ABSTRACT
In this paper we present a model to immunize a future stream of assets and liabilities against interest-rate risk by means of futures contracts on government bonds. The hedging strategies derived from the model reduce significantly the market risk. The concepts of dollar duration and dollar convexity play an important role in measuring and controlling interest-rate risk. Specifically, the risk of small or moderate parallel shifts in the term structure of interest rate is controlled, there is no control on other risks. The robustness of the derived strategies is assessed in terms of the methodology of value at risk. An application is addressed by the way of illustration.
KEYWORDS
Portfolio immunization; Interest-rate risk; Futures contracts; Value at risk