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Bond Immunization and Exchange Rate Risk: Some Further Considerations

Author

Listed:
  • Ivan Ivanov

    (Ramapo College of New Jersey)

  • Jason Hecht

    (Ramapo College of New Jersey)

Abstract

This research project seeks to address two critical problems in the theory of international bond pricing: 1) how can exchange rate risk be formally incorporated into standard bond valuation models?, and 2) how must strategies to “immunize†bonds against interest rate and inflation risk be modified to also incorporate exchange rate risk? Most of all, this study analyzes the mathematical properties of international bonds (e.g., Eurobonds). A special consideration is given to the two most important characteristics of debt securities – duration and convexity and through them to the various ways to immunize bonds and bond portfolios from real interest, inflation, and exchange rate risks. Fogler (1984) formally addressed the effects of changes in inflation and interest rates on bond prices. Unfortunately, exchange rate risk does not appear to have been formally incorporated into these previous models. Moreover, we correct a mathematical error in Fogler’s analysis.

Suggested Citation

  • Ivan Ivanov & Jason Hecht, 2007. "Bond Immunization and Exchange Rate Risk: Some Further Considerations," Money Macro and Finance (MMF) Research Group Conference 2006 63, Money Macro and Finance Research Group.
    • Handle: RePEc:mmf:mmfc06:63
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    File URL: http://repec.org/mmf2006/up.8918.1145151440.pdf
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    More about this item

    Keywords

    bond immunization;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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