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Optimal interest rate derivatives portfolio with controlled sensitivities

Author

Listed:
  • Konstantinos Kiriakopoulos
  • George Kaimakamis
  • Charalambos Botsaris

Abstract

In the interest rate market, the use of derivatives is necessary and can significantly influence the balance sheet of a bank. Moreover, in the light of the recent crisis, it became obvious the need for portfolios with specific and known risk characteristics. This paper proposes a method for constructing optimal portfolios of derivatives with specific risk/return characteristics in the interest rate market. The portfolios can include any interest rate derivative security such as bonds, swaps, caps, floors, swaoptions, CMS, etc. The optimal portfolios will have their risk sensitivities (delta, gamma, theta, etc.) within prespecified bands. In this way, the trade-off between risk and return will be controlled through the life of the portfolio avoiding unwanted risks. The method proposed is structural and dynamic so that it can fit to trading level, risk management level and senior management level. Moreover, the method can include VAR and CVAR techniques which are currently used in risk management.

Suggested Citation

  • Konstantinos Kiriakopoulos & George Kaimakamis & Charalambos Botsaris, 2010. "Optimal interest rate derivatives portfolio with controlled sensitivities," International Journal of Decision Sciences, Risk and Management, Inderscience Enterprises Ltd, vol. 2(1/2), pages 112-128.
    • Handle: RePEc:ids:ijdsrm:v:2:y:2010:i:1/2:p:112-128
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    Cited by:

    1. Akhter Mohiuddin Rather, 2012. "Portfolio selection using mean-risk model and mean-risk diversification model," International Journal of Operational Research, Inderscience Enterprises Ltd, vol. 14(3), pages 324-342.

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