Hedging the Interest Rate Risk of Brady Bonds

96-50

Posted: 22 Jan 1997

See all articles by Jacob Boudoukh

Jacob Boudoukh

Interdisciplinary Center (IDC) Herzliyah; AQR Capital Management, LLC

Matthew P. Richardson

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); AQR Capital Management, LLC

Robert Whitelaw

New York University; National Bureau of Economic Research (NBER)

Date Written: Undated

Abstract

While there is significant interest in investing in Brady bonds, the source of attraction is often the exposure to sovereign risk (and its yield compensation), while the exposure to U.S. interest rate risk is a "necessary evil". This paper addresses the problem of determining the interest rate sensitivity of Brady debt. We show that the most relevant state variables in determining the duration of a Brady bond are U.S. interest rates and the bond's strip spread. Motivated by the difficulty of using structural models to price and hedge Brady debt, we provide a model-free approach to estimating the hedge ratio. Using our approach to hedge the Argentinian Par and Discount Brady bonds, we find that only a small fraction (15% or so) of the total risk is hedgeable, but our hedged portfolio exhibits little covariation with U.S. interest rates.

JEL Classification: G10

Suggested Citation

Boudoukh, Jacob and Richardson, Matthew P. and Whitelaw, Robert F., Hedging the Interest Rate Risk of Brady Bonds (Undated). 96-50. Available at SSRN: https://ssrn.com/abstract=8051

Jacob Boudoukh (Contact Author)

Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Matthew P. Richardson

New York University (NYU) - Department of Finance ( email )

44 West 4th Street
Suite 9-190
New York, NY 10012-1126
United States
212-998-0349 (Phone)
212-995-4233 (Fax)

National Bureau of Economic Research (NBER)

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United States

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Robert F. Whitelaw

New York University ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0338 (Phone)
212-995-4233 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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