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FINANCIAL MARKET COURSES

Bond Hedging with Swaps

Fund managers can protect their bond portfolios against rising interest rates by implementing hedges. Essentially, hedges are a type of insurance against the possibility of unfavorable occurrences. Hedges can be structured using many different underlying instruments, such as futures, options, and swaps. They can also be implemented by using many different hedging strategies.

 

This course focuses on the use of interest rate swaps to hedge bond portfolios. Swap contracts can change the cash flow characteristics of an asset, thereby reducing or eliminating the interest rate exposure for that particular asset. The course examines the use of par swap contracts as the underlying hedging instrument, the features and characteristics of such hedges, and demonstrates how to implement a swap-based hedging strategy.

  • OBJECTIVES

    On completion of this course, you will be able to:

    Identify the reasons for, and the economic rationale of, interest rate hedges using par swap contracts

    Design and implement a specific swap-based bond hedging strategy

  • COURSE OUTLINE

    Topic 1: Basics of Bond Hedging with Swaps

    Swaps as a Hedging Instrument

    The Hedging Process and Concepts

    o Duration of an Interest Rate Swap

    o Factor Sensitivity

    o Effectiveness Testing

    Topic 2: Structuring Swap-based Bond Hedges

    Steps: Swap-based Hedging Strategy

    o Step 1: Create the Spread to the Par Swap Curve

    o Step 2: Determine the Factor Sensitivity of the Bonds

    o Step 3: Determine the Factor Sensitivity of the Par Swaps

    o Step 4: Calculate the Hedge Amount of Par Swaps

    o Step 5: Test the Effectiveness of the Hedge against Rate Shifts

  • PREREQUISITE KNOWLEDGE

  • ESTIMATED COMPLETED TIME

    60 Minutes

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