Strategic Interest Rate Hedges, or How Derivatives Can Help Solve the Pension Fund Crisis Part Ii

Alternative Investment Research Centre Working Paper No. 0024

Cass Business School Research Paper

22 Pages Posted: 16 Sep 2005

See all articles by Harry M. Kat

Harry M. Kat

Independent

Theo P. Kocken

Cardano Risk Management

Janwillem Engel

Cardano Risk Management

Date Written: September 2005

Abstract

In this paper we use a scenario-based ALM model to study the impact of different interest rate derivatives strategies on the risk-return profile of a defined benefit pension fund. The results show that properly constructed hedging strategies using swaps and swaptions can add substantial value. Increased risk perception due to fair value accounting and regulation can be dealt with effectively via these techniques. The results are robust with respect to the assumed interest rate mean reversion level. An expected rise in interest rates is therefore no reason to refrain from hedging.

Keywords: Pension fund, swap, swaption, hedging, interest rate risk

Suggested Citation

Kat, Harry M. and Kocken, Theo P. and Engel, Janwillem, Strategic Interest Rate Hedges, or How Derivatives Can Help Solve the Pension Fund Crisis Part Ii (September 2005). Alternative Investment Research Centre Working Paper No. 0024; Cass Business School Research Paper. Available at SSRN: https://ssrn.com/abstract=801207 or http://dx.doi.org/10.2139/ssrn.801207

Harry M. Kat (Contact Author)

Independent

No Address Available

Theo P. Kocken

Cardano Risk Management ( email )

Beurs World Trade Centre, 11th Floor
Beursplein 37
Rotterdam 3011 AA
Netherlands
+31-10-2434747 (Phone)
+31-10-4660907 (Fax)

Janwillem Engel

Cardano Risk Management ( email )

Rotterdam 3011 AA
Netherlands

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