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Enhancement of the bond portfolio Immunization under a parallel shift of the yield curve

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  • Jaffal Hanan
  • Yassine Adnan
  • Rakotondratsimba Yves

Abstract

Hedging under a parallel shift of the interest rate curve is well-known for a long date in finance literature. It is based on the use of a duration-convexity approximation essentially pioneered by Fisher-Weil [2]. However the situation is inaccurately formulated such that the obtained result is very questionable. Motivations and enhancement of such approximation have been performed in our recent working paper [5],"Enhancement of the Fisher-Weil bond technique immunization". So it is seen that the introduction of a term measuring the passage of time and high order sensitivities lead to very accurate approximation of the zero-coupon price change. As a result, the immunization of a portfolio made by coupon-bearing bonds may be reduced to a non-linear and integer minimization problem. In the present work, we show that actually a mixed-integer linear programming is needed to be considered. This last can be handled by making use of standard solvers as the CPLEX software.

Suggested Citation

  • Jaffal Hanan & Yassine Adnan & Rakotondratsimba Yves, 2012. "Enhancement of the bond portfolio Immunization under a parallel shift of the yield curve," Journal of Finance and Investment Analysis, SCIENPRESS Ltd, vol. 1(2), pages 1-9.
    • Handle: RePEc:spt:fininv:v:1:y:2012:i:2:f:1_2_9
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