Derivatives Strategies for Bond Portfolios

In this paper, we examine how standard exchange-traded fixed-income derivatives (futures and options on futures contracts) can be included in a sound risk and asset management process so as to improve risk and return performance characteristics of managed portfolios.

Author(s):

Felix Goltz

Research Engineer at the EDHEC Risk and Asset Management Research Centre

Lionel Martellini

Professor of Finance at EDHEC Graduate School of BusinessScientific Director of the EDHEC Risk and Asset Management Research Centre

Volker Ziemann

Research Engineer at the EDHEC Riskand Asset Management Research Centre

Our results show that the non-linear character of the returns on protective option strategies offers appealing risk reduction properties in the pure asset management context. Consequently, such strategies should optimally receive a significant allocation, especially when investors are concerned with minimising extreme risks. In an asset liability management context, we also show that fixed-income derivatives in general, and recently launched long-term futures contracts in particular, offer significant shortfall risk reduction benefits. These results have potentially significant implications in the context of an increased focus on matching liability portfolios.

Type: Working paper
Date: le 06/08/2007
Research Cluster : Finance

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