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Arbitrage Strategies for Fixed Income Portfolio Investment

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Title: Arbitrage Strategies for Fixed Income Portfolio Investment


1
Arbitrage and Hedging Strategies for
Fixed Income Portfolio Management
By
Win Udomrachtavanich,Ph.D., FRM
Kasikorn Asset Management
15 May 2007
2
Outline
  • Fixed Income Arbitrage Strategies
  • Fixed Income Hedging Strategies
  • Fixed Income Investment in foreign markets

3
Arbitrage Strategies for Fixed Income
Investment
4
Arbitrage Strategies for Fixed Income Portfolio
  • Arbitrage ?
  • The practice of taking advantage of a price
    differential between different instruments and/or
    markets
  • Idea ? Buy low , Sell high ? use of Relative
    Valuation Analysis
  • Example
  • If the price of Microsoft stock on the NASDAQ is
    traded at 30 USD/share and its corresponding
    futures contract on the CME is traded at 2950
    USD/contract in which one contract will delivered
    100 shares of Microsoft. one can buy the less
    expensive instrument (Futures) and sell the more
    expensive (common stock). The differential is the
    arbitrage profit that arbitrageur would receive
    (0.5USD/Share).

5
Arbitrage Strategies for Fixed Income Portfolio
  • Relative Valuation Analysis
  • Yield Spread Arbitrage (Cheap/Rich, OAS)
  • Term Structure Arbitrage (Forward Rate and
    Arbitrage)
  • Convertible Arbitrage
  • On-the-run and Off-the-run Arbitrage
  • Bond Swaps

6
Relative Valuation Analysis
  • Yield Spread Arbitrage ?
  • Comparing spread of the bond over some benchmark
    to the required spread and determining whether
    the bond is overvalued or undervalued
    relative to the benchmark
  • Complication
  • Too many types of spread !!!
  • Too many types of benchmark !!!

7
Relative Valuation Analysis
  • Types of spread
  • Nominal Spread
  • Zero Volatility Spread (Z-spread)
  • Option-adjusted Spread (OAS)

8
Relative Valuation Analysis
  • Types of Benchmark
  • Treasury Benchmark
  • Bond Sector Benchmark (usually higher-rated bond
    within the same sector)
  • Issuer-Specific Benchmark

9
Relative Valuation Analysis
  • Cheap/Rich
  • Cheap / Undervalued
  • ? spreads larger than required spread
  • Rich / Overvalued
  • ? spreads smaller than required spread
  • Fair / Properly valued
  • ? spreads equal to the required spread

10
Relative Valuation Analysis
  • Example
  • A callable corporate ABC bond has nominal spread
    relative to treasury yield curve at 240 bps,
    Z-spread relative to Treasury spot curve at 200
    bps, OAS relative to Treasury spot curve at 180
    bps. If a comparable option-free XYZ bond in the
    market has Z-spread of 200 bps. Determine whether
    ABC bond is overvalued, undervalued, or properly
    valued relative to XYZ bond?
  • Answer ABC is Overvalued relative to XYZ
  • Strategy Long XYZ bond and short ABC bond

11
Relative Valuation Analysis
This is OAS spread!!
Source Bloomberg
12
Relative Valuation Analysis
  • Forward Rate and Arbitrage
  • Idea
  • Current forward rate approximately reflects
    expectation on future rates
  • Forward rate
  • Example 1-year zero coupon bond yield is 6,
    2-year zero coupon bond yield is 8, then 1 year
    forward rate one year from now

13
Relative Valuation Analysis
  • Forward Curve and Spot Curve

14
Relative Valuation Analysis
  • Forward Rate and Arbitrage
  • What if market expectation for 1f1 is 8, what is
    the implication?
  • Yield of 2-year zero coupon bond falls to around
    7
  • Or, Yield of 1-year zero coupon bond rises to
    around 8
  • Or, combination of both.
  • ? flattening yield curve
  • Strategy
  • Short 1-year bond and long 2-year bond for
    expected capital gain

15
Relative Valuation Analysis
  • Convertible Arbitrage
  • involves purchasing a portfolio of convertible
    securities, generally convertible bonds, and
    hedging a portion of the equity risk by selling
    short the underlying common stock to make
    portfolio Delta-neutral
  • Idea
  • Convertible bond is sometime price inefficiently
    relative to underlying stock due to
  • Lack of liquidity
  • High Volatility in Interest rate
  • market psychology

16
Relative Valuation Analysis
  • Example
  • Convertible bond of ABC corporation is priced at
    850 with conversion ratio of 100. ABC common
    stock is currently traded at 9. What would be the
    profit from implementing convertible arbitrage
    strategy?
  • Answer arbitrage profit would be 0.5 per share.
  • What if price of ABC stock changes??

17
Relative Valuation Analysis
  • Risks associated with Convertible Arbitrage
    Strategy
  • Equities Risk
  • Interest rate Risk
  • Credit Risk
  • Liquidity Risk
  • Note
  • Both prices of convertible bond and common stock
    could simultaneously move at different rate.
  • ? Required Dynamic Delta Hedging
  • ? Quite demanding and costly

18
Relative Valuation Analysis
  • On-the-run and Off-the-run
  • On-the-run ? newest issued securities of a
    given series
  • Off-the-run ? previously issued securities
  • Idea On-the-run issues have the largest
    trading volume ? higher liquidity ? Less
    liquidity Risk ? lower required spread ?
    Disparity between On-the-run and Off-the-run
    yield
  • Recall Disparity creates Arbitrage
    Opportunities

19
Relative Valuation Analysis
  • Spread b/w On-the-run and Off-the-run
  • Spread Off-the-run yield On-the-run
    yield
  • Example 10-year bonds On-the-run yield is
    3.85 and Off-the-run yield is 3.9, the spread
    is 5 bps
  • See that price of On-the-run is more expensive
    than Off-the-run securities
  • Usually, due to heavy arbitrage activities, yield
    converge to be very close as time pass

20
Relative Valuation Analysis
Source Bloomberg
21
Relative Valuation Analysis
  • Sample of On-the-run and Off-the-run Yield Spread

Source Federal Reserve, Columbia University
Archive 2003
22
Bond Swaps
  • In a bond swap, a portfolio manager exchanges an
    existing bond or set of bonds for a different
    issue
  • Bond swaps are intended to
  • Increase current income
  • Increase yield to maturity
  • Improve the potential for price appreciation with
    a decline in interest rates
  • Establish losses to offset capital gains or
    taxable income

23
Bond Swaps
  • Types of Bond Swaps
  • Substitution swaps / Yield Pick up swaps
  • Intermarket or yield spread swaps
  • Bond-rating swaps
  • Quality swaps
  • Rate anticipation swaps

24
Substitution Swaps / Yield Pick up Swaps
  • In a substitution swap, the investor exchanges
    one bond for another of similar risk and maturity
    to increase the current yield
  • Strategy

25
Substitution Swaps / Yield Pick up Swaps
  • Example
  • Selling a XXX bond with 8 coupon for par and
    buying a YYY bond with 8 coupon for 980
  • Outcome immediate profit is pick up in the
    current yield by 16 basis points
  • Note
  • Profitable substitution swaps are inconsistent
    with market efficiency
  • Obvious opportunities for substitution swaps are
    rare

26
Intermarket or Yield Spread Swaps
  • The intermarket or yield spread swap involves
    bonds that trade in different markets/sectors
  • i.e., government versus corporate bonds
  • Small differences in different markets can cause
    similar bonds to behave differently in response
    to changing market conditions

27
Intermarket or Yield Spread Swaps
  • In a flight to quality, investors become less
    willing to hold risky bonds
  • As investors buy safe bonds and sell more risky
    bonds, the spread between their yields widens
  • Flight to quality can be measured using the
    confidence index
  • The ratio of the yield on AAA bonds to the yield
    on BBB bonds

28
Bond-Rating Swaps
  • A bond-rating swap is really a form of
    intermarket swap
  • If an investor anticipates a change in the yield
    spread, he can swap bonds with different ratings
    to produce a capital gain with a minimal increase
    in risk

29
Quality Swaps
  • Strategy of buying bonds with high or low quality
    rating based on the expectation of a change in
    economic states.
  • Strategy

30
Rate Anticipation Swap
  • In a rate anticipation swap, the investor swaps
    bonds with different interest rate risks in
    anticipation of interest rate changes/ Yield
    curve shifts.
  • Strategy

31
Long-Term Capital Management Case (LTCM)
  • Background
  • Found in 1994 by a group of ex Solomon Brothers
    Traders
  • Joined by 2 prominent academia ? Merton and
    Scholes
  • Average annualized return on the first several
    years was approximately 40
  • Collapse in 1998, in which lost 4.6 billion in 4
    months
  • Bailed-out orchestrated by FBNY along with other
    key major investment banks
  • Officially liquidated in early 2000

32
Long-Term Capital Management Case (LTCM)
  • Trading Strategies Involved
  • Convertible Arbitrage
  • On-the-run / Off-the-run Arbitrage
  • Yield Curve Arbitrage
  • Along with usage of Derivatives to enhance return

33
Long-Term Capital Management Case (LTCM)
  • Sample of On-the-run and Off-the-run Arbitrage
    practice by LTCM

Source Federal Reserve, Columbia University
Archive 2003
34
Long-Term Capital Management Case (LTCM)
  • Key Profit Generation
  • Leverage ? some speculate that the number was gt
    1001
  • Example
  • LTCM bought 1 billion of Cheap off-the-run
    bond
  • Short 1 billion of expensive on-the-run
  • Off-the-run position is used as collateral for
    on-the-run
  • Results is no money need to pay upfront.
  • If everything works as planned (when on-the-run
    and off-the-run rates converge), profit would
    be 15 millions from this transaction

35
Long-Term Capital Management Case (LTCM)
  • Trigger of the fall
  • Russian bond defaulted in 1997 ? Flight to
    Quality ? Spread rise between Emerging markets
    and US bonds, Spread rise between On-the-run
    and Off-the-run
  • Multiply effect with Large position in
    derivatives for leverage ? Dooms Day solution !!!

36
Hedging Strategies for Fixed Income Investment
37
Hedging Strategies for Fixed Income Investment
  • Portfolio Immunization
  • Laddered Portfolio
  • Derivatives and Hedging Strategies for Fixed
    Income Investment
  • Bond Futures
  • Option

38
Portfolio Immunization
  • If the average duration of a portfolio equals the
    investors desired holding period, the effect is
    to hold the investors total return constant
    regardless of whether interest rates rise or
    fall.
  • In the absence of borrower default, the
    investors realized return can be no less than
    the return he has been promised by the borrower.

39
Example Portfolio Immunization
  • Assume we are interested in a 1,000 par value
    bond that will mature in two years.
  • The bond has a coupon rate of 8 percent and pays
    80 in interest at the end of each year.
  • Interest rates on comparable bonds are also at 8
    percent but may fall to as low as 6 percent or
    rise as high as 10 percent.

40
Example Portfolio Immunization
  • The buyer knows he will receive 1000 at
    maturity, but in the meantime he faces the
    uncertainty of having to reinvest the annual 80
    in interest earnings at 6, 8, or 10.

41
Example Case 1
  • Let interest rates fall to 6.
  • The bond will earn 80 in interest payments for
    year one, 80 for year two, and 4.80 (80 x
    0.06) when the 80 interest income received the
    first year is reinvested at 6 during year 2.

42
Example Case 1
  • How much will the investor earn over the two
    years?
  • First years interest earnings Second years
    interest earnings Interest earned reinvesting
    the first years interest earnings at 6 Par
    value of the bond at maturity.
  • 80 80 4.80 1,000 1,164.80

43
Example Case 2
  • Let interest rates rise to 10.
  • The bond will earn 80 in interest payments for
    year one, 80 for year two, and 8.00 (80 x
    0.10) when the 80 interest income received the
    first year is reinvested at 10 during year 2.

44
Example Case 2
  • How much will the investor earn over the two
    years?
  • First years interest earnings Second years
    interest earnings Interest earned reinvesting
    the first years interest earnings at 10 Par
    value of the bond at maturity.
  • 80 80 8 1,000 1,168.00

45
Immunization and Duration
  • The investors earnings could drop as low as
    1,164.80 or rise as high as 1,168.
  • But, if the investor can find a bond whose
    duration matches his or her planned holding
    period, he or she can avoid this fluctuation in
    earnings.
  • The bond will have a maturity that exceeds the
    investors holding period, but its duration will
    match it.

46
Recall Example Case 1
  • Let interest rates fall to 6.
  • The bond will earn 80 in interest payments for
    year one, 80 for year two, and 4.80 (80 x
    0.06) when the 80 interest income received the
    first year is reinvested at 6 during year 2.
  • But, the bonds market price will rise to
    1,001.60 due to the drop in interest rates.

47
Recall Example Case 1
  • How much will the investor earn over the two
    years?
  • First years interest earnings Second years
    interest earnings Interest earned reinvesting
    the first years interest earnings at 6 Market
    price of the bond at the end of the investors
    planned holding period.
  • 80 80 4.80 1,001.60 1,166.40

48
Recall Example Case 2
  • Let interest rates rise to 10.
  • The bond will earn 80 in interest payments for
    year one, 80 for year two, and 8.00 (80 x
    0.10) when the 80 interest income received the
    first year is reinvested at 10 during year 2.
  • But, the bonds market price will fall to 998.40
    due to the rise in interest rates.

49
Recall Example Case 2
  • How much will the investor earn over the two
    years?
  • First years interest earnings Second years
    interest earnings Interest earned reinvesting
    the first years interest earnings at 10 Par
    value of the bond at maturity.
  • 80 80 8 998.40 1,166.40

50
Portfolio Immunization
  • The investor earns identical total earnings
    whether interest rates go up or down.
  • With duration set equal to the buyers planned
    holding period, a fall (rise) in the reinvestment
    rate is completely offset by an increase (a
    decrease) in the bonds market price.
  • Immunization using duration seems to work
    reasonably well because the largest single
    element found in most interest rate movements is
    a parallel change in all interest rates (explains
    about 80 of all interest rate movements over
    time).
  • So, investors can achieve reasonably effective
    immunization by approximately matching the
    duration of their portfolios with their planned
    holding periods.

51
Opportunity Cost and Portfolio Immunization
  • Duration is not free. There is an opportunity
    cost.
  • If the investor had simply bought a bond with a
    calendar maturity of two years and interest rates
    rose, he or she would have earned 1,168.
  • The opportunity cost of immunization is a lower,
    but more stable, expected return.

52
Limitation of Portfolio Immunization
  • In reality it can be difficult to find a
    portfolio of securities whose average portfolio
    duration exactly matches the investors planned
    holding period.
  • As the investor grows older, his planned holding
    period grows shorter, as does the average
    duration of his portfolio, but they may not
    decline at the same rate.
  • Portfolio requires constant adjustments.

53
Limitation of Portfolio Immunization
  • Many bonds are callable so bondholders may find
    themselves with a sudden and unexpected change in
    their portfolios average duration.
  • The future path of interest rates cannot be
    perfectly forecast therefore, immunization with
    duration cannot be perfect without the use of
    complicated models.

54
Contingent Immunization
  • Contingent Immunization is a mixed of both an
    active and passive strategy.
  • Bond manager pursues an active bond strategy
    until an agreed-upon minimum rate is reached or
    safety margin approaches zero when that occurs
    the manager immunizes the position.

55
Contingent Immunization
  • Example
  • Suppose an Investment Company offers a contingent
    immunization strategy for investors with HD 3.5
    years based on a current 4-year, 9 annual coupon
    bond trading at a YTM of 10 (assume flat YC at
    10). The bond has a duration of 3.5 years and
    an immunization rate of 10, in which assumes
    that minimum target rate is approximately 8.
  • Strategy
  • the investment will be immunized when the
    following case occurs
  • The minimum target rate is reached 8
  • The investments safety margin is zero

56
Contingent Immunization
  • Suppose the investment company has a client with
    1M to invest and HD 3.5 years.
  • Clients Initial Safety Margin (SM)

57
Contingent Immunization
  • As part of its active strategy, suppose the
    investment company invest the clients funds in a
    10-year, 10 annual coupon bond trading at par.
  • Scenario 1 One year later the YC shifts down to
    8
  • Clients Safety Margin (SM)

58
Contingent Immunization
  • With a positive SM, the company could maintain
    its current investment, pursue a different active
    strategy, or it could immunized the position.
  • If the company immunizes, it would liquidate the
    original 10-year bond and purchase a bond with HD
    2.5 years yielding 8 (assume flat YC at 8).
    If it did this, it would be able to provide the
    client with a 11.96 rate for the 3.5 year period

59
Contingent Immunization
  • Scenario 2 One year after investing in the
    10-year bond, the YC shifts up to 12.25.
  • Clients Safety Margin (SM)

60
Contingent Immunization
  • With the SM approximately zero, the company would
    immunized the position.
  • The company would liquidate the original 10-year
    bond and purchase a bond with HD 2.5 years,
    yielding 12.25 (assume flat YC at 12.25). For
    the 3.5 year period the rate would be the minimum
    target rate of 8

61
Laddered Portfolio
  • In a laddered strategy, the fixed-income dollars
    are distributed throughout the yield curve
  • A laddered strategy eliminates the need to
    estimate interest rate changes
  • For example, a 1 million portfolio invested in
    bond maturities from 1 to 25 years (see next
    slide)

62
Laddered Portfolio
Par Value Held ( in Thousands)
Years Until Maturity
63
Laddered Portfolio
  • In laddered portfolio, the principal proceeds
    from the matured bond will be reinvested at the
    longer end of the ladder, often at higher
    interest rate.
  • Portfolio Return and rate scenarios
  • Unchanged Rate ? return is stable and fairly
    closed to the highest yield in portfolio
  • Rising Rate ? return drop at first and recover
    later from reinvest in longer term bonds at the
    lower cost
  • Falling Rate ? return rise at first and drop
    later from reinvest in longer term bonds at the
    higher cost

64
Laddered Portfolio
Source Thornburg Financial
65
Derivatives in Fixed-Income Management
  • Primary Usage
  • Derivatives (i.e., Futures, Swap, and Option) can
    be used to modify portfolio risk and return
  • Using derivative for asset allocation ? portable
    alpha??
  • Adjusting allocations in the underlying assets
    can be very expensive
  • Less costly to achieve a similar asset allocation
    exposure using derivatives, especially for
    temporary adjustments
  • To control portfolio cash flows
  • Hedging portfolio cash inflows and outflows
  • Hedging instruments against risk factors, i.e.,
    interest rate risk
  • Target duration Contribution of current bond
    portfolio contribution of the futures component

66
Futures
  • Treasury bond futures contract
  • Typically used contract for risk management of
    fixed-income portfolios
  • Deliver pre-specified T-bonds at the expiration
  • Those that are delivered are the
    cheapest-to-deliver (CTD) that satisfies contract
  • Most common usage ? Duration Hedging

67
Futures
  • Determining How Many Contracts to Trade to Hedge
    a portfolio position ? determine Hedge Ratio
  • Hedge ratio
  • Conversion factor
  • Adjusts the CTD bond to 8 (required for
    delivery)
  • Duration adjustment factor (DAF)
  • Reflects the difference in interest rate risk
    between the CTD bond and the portfolio being
    hedged

68
Futures
  • Example
  • Suppose there is a 6-month hedging horizon and a
    portfolio value of 100 million. Further assume
    that the matching instrument is T-bond futures
    contract, which is quoted at 105-09 with the
    contract size of 100,000. The duration of the
    portfolio is 10, and the duration of the futures
    contract is 12. What is the contract no. required
    to trade to completely hedge this portfolio
    against small changes in yield?
  • Answer
  • But because we long bonds, therefore to make the
    portfolio Duration-Neutral, the manager needs to
    short 792 contracts of T-bond futures

69
Futures
  • Using Futures in Passive Fixed-Income Portfolio
    Management
  • Will use futures primarily to manage Cash flow
    assets and liabilities
  • Will not use futures to actively adjust duration
    due to interest forecasts

70
Futures
  • Using Futures in Active Fixed-Income Portfolio
    Management
  • Modifying systematic risk
  • Changing the portfolio duration in light of
    interest rate forecasts
  • Lengthen duration if rates are expected to fall
  • Modifying unsystematic risk
  • Opportunities are more limited here, but can
    adjust exposure to various sectors to take
    advantage of expected yield changes

71
Futures
  • Changing the Duration of a Corporate Bond
    Portfolio
  • There are no corporate bond futures contracts, so
    strategies are based on using T-bond futures
  • Corporate bond yields also impacted by changes in
    default risk, unlike T-bond yields
  • T-bonds are a cross hedge instrument
  • Differences could impact the number of contracts
    required to hedge a corporate bond portfolio

72
Futures
  • Modifying the Characteristics of an
    International Bond Portfolio
  • Positions in foreign bonds are positions in both
    securities and currencies
  • Futures and option contracts allow the portfolio
    manager to manage the risks of the currency and
    the security separately
  • In a passive strategy, the manager can hedge the
    risk exposure
  • In an active strategy, the manager can adjust the
    exposure to try to benefit from expected changes
    in exchange rates

73
Option
  • Use of call, put, or combinations
  • Practical Fixed Income strategies using options
  • Portfolio Insurance ? long bonds, long puts
  • Covered Calls ? long bonds, short calls
  • Buy-Writes ? long bonds, short calls to the same
    dealer at the time of long bonds
  • Writing Puts ? short puts (naked position)

74
International Fixed Income markets
75
International Fixed Income markets
  • Rational of International Fixed Income Investment
  • Styles of International Bond Portfolio Management
  • Return of International Bond portfolio and
    sources of return
  • Currency Hedge Decision

76
International Fixed Income markets
  • Rationales
  • Higher return than domestic products
  • Broader diversification
  • Speculate in FX markets

77
International Fixed Income markets
Source Merrill Lynch, as of 2005
78
International Fixed Income markets
79
International Fixed Income markets
  • Styles of International Bond Portfolio Management
  • Fundamental style ? economic cycle based
  • Black-box approach ? Quant based
  • Experienced traders ? experience and intuition to
    identify market opportunities ? Active approach
  • Technicians/ Chartist ? technical analysis to
    timing buy and sell ? Trend Reader
  • Benchmarkier ? pure passive approach

80
International Fixed Income markets
  • Sample of available benchmarks
  • JPMorgan Global Government Bond
  • JPMorgan Government Bond EMU
  • JPMorgan Emerging Markets Band Index Plus (EMBI)
  • iBoxx Euro Overall
  • iBoxx Euro Sovereigns
  • iTraxx Asian Series
  • etc.

81
International Fixed Income markets
  • Benchmark Dilemma
  • Bond inclusion difficulty
  • Size of issuance small
  • Credit rating limit varies
  • Country weights
  • Driven by country budget situation, e.g. Japan
  • Market capitalization can change quickly between
    countries
  • Duration between countries indices vary
    significantly
  • Replicability
  • Bid-ask spreads generally wide
  • Certain issues see small turnover from buy and
    hold investor
  • Total return approach, focus on alpha generation

82
International Fixed Income markets
  • Return of International Bond portfolio and
    sources of return
  • Total expected portfolio return in managers home
    currency e (ri)
  • N number of countries whose bonds are in the
    portfolio
  • W weight of country i s bonds in the portfolio
  • ri expected bond return for country i s in
    local currency
  • eH,i expected percentage change of the home
    currency with country is local currency ?
    currency return ? depreciation of home currency
    over period

83
International Fixed Income markets
  • Example
  • Suppose a U.S. portfolio manager invests in US
    treasury bonds with expected return at 4.5. He
    also diversifies his investment global to reduce
    volatility by investing in a Japanese Bond and a
    UK Gilt. Proportion of his investment in US
    Treasury, Japanese bond and UK Gilt is 801010.
    The expected return over the investment holding
    period of Japanese bond and UK gilt are 1.2 and
    5 respectively. If Japanese Yen depreciates
    against USD by 1 and UK sterling depreciates
    against USD by 0.5 over the investment period.
    What should be the expected return of his
    portfolio?
  • Answer expected return 0.84.5
    0.1(1.2-1)0.1(5-0.5) 4.07
  • He turns to be worse off with his global
    diversification strategy due to stronger USD
    against other currencies.
  • Question to hedge or not to hedge???

84
International Fixed Income markets
  • If hedged currency, it means buying forward
    contract and lock in rate
  • Total expected portfolio return in managers home
    currency if hedged e (ri)
  • N number of countries whose bonds are in the
    portfolio
  • W weight of country i s bonds in the portfolio
  • ri expected bond return for country i s in
    local currency
  • fH,i forward rate discount or premium between
    the home currency and country i s local currency
    ?
  • cH and ci are short-term interest rate in home
    and country i that matched maturity of forward
    rate.

85
International Fixed Income markets
  • Other alternative strategies besides using
    forward contract
  • Cross Hedging
  • Idea long bond i, and hedged by long forward to
    deliver currency j against currency i ? close FX
    exposure in currency i and open FX exposure in
    currency j
  • Return
  • Proxy Hedging
  • Idea long bond i, leave FX exposure in currency
    i and short position in currency j ? cheaper to
    hedged in currency j
  • Return

86
International Fixed Income markets
  • Other considerations
  • Taxation
  • Regulations and legal system
  • Political stability
  • Economic Stability
  • Liquidity
  • Etc.

87
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