Immunization Strategy for Multinational Fixed-Income Investments

Managing Global Currency Risk, pp. 143-152, 1997

10 Pages Posted: 24 Feb 2008 Last revised: 8 Oct 2013

See all articles by Shmuel Hauser

Shmuel Hauser

Ben-Gurion University of the Negev - School of Management; Government of the State of Israel - Israel Securities Authority

Azriel Levy

Hebrew University of Jerusalem; Bank of Israel

Uzi Yaari

Rutgers University; School of Business-Camden

Abstract

This paper extends the results of Gadkari and Spindel (Solomon Brothers 1989), Hauser and Levy (JBE v.43, 1991), and Leibowitz, Bader, and Kogelman (JFI v.3, 1993) who show that hedging currency risk converts some or all of the foreign-held claims to synthetic domestic claims. Fixed-income asset and liability portfolios held in various currencies by multinational operating companies and financial institutions are subject to a combination of foreign currency risk and interest rate risk. Redington (JIA v.18, 1952) and Bierwag, Kaufman, and Toevs (JFQA v.18, 1983) show how to immunize interest rate risk in a fixed-income portfolio invested in a single currency. When their approach is extended to the problem of immunization in the multinational arena, interest rate risk and currency risk must be managed simultaneously. Direct implementation of their approach would require separate matching of duration of assets and liabilities in each country, a solution that is likely to be prohibitively costly. In this paper, we explore the conditions under which the multinational firm can dramatically lower hedging costs by matching the overall duration of asset and liability portfolios rather than matching those durations separately in each country. In that setting, the optimal management of interest rate and foreign currency risks can be separated too.

Keywords: fixed-income immunization, hedging currency risk, hedging interest-rate risk, multinational investment portfolio

JEL Classification: F21, F23, F31, F34, F36, G11, G15, G32

Suggested Citation

Hauser, Shmuel and Levy, Azriel and Yaari, Uzi, Immunization Strategy for Multinational Fixed-Income Investments. Managing Global Currency Risk, pp. 143-152, 1997, Available at SSRN: https://ssrn.com/abstract=1096987

Shmuel Hauser

Ben-Gurion University of the Negev - School of Management ( email )

P.O. Box 653
Beer-Sheva 84105
Israel
+972 2 651 3939 (Phone)
+972 7 6472896 (Fax)

Government of the State of Israel - Israel Securities Authority

22 Kanfei Nesharim Street
Jerusalem 95464
Israel

Azriel Levy

Hebrew University of Jerusalem ( email )

Mount Scopus
Jerusalem, Jerusalem 91905
Israel

Bank of Israel

P.O. Box 780
Jerusalem, 91907
Israel

Uzi Yaari (Contact Author)

Rutgers University ( email )

School of Business
Camden, NJ 08102
United States
610-664-2086 (Phone)

HOME PAGE: http://camden-sbc.rutgers.edu/FacultyStaff/Directory/yaari.htm

School of Business-Camden ( email )

Rutgers University
227 Penn Street
Camden, NJ 08102
United States
610-664-2086 (Phone)
610-664-2198 (Fax)

HOME PAGE: http://camden-sbc.rutgers.edu/FacultyStaff/Directory/yaari.htm

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