Hedging bonds subject to credit risk |
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| Institution: | 1. Faculty of Economics and Management, University of Tlemcen, 22, Rue Abi Ayed Abdelkrim Fg Pasteur B.P.119, Tlemcen 13000, Algeria;2. International University of Rabat, Rabat Business School, BEAR-lab, Parc Technopolis – Rabat-Shore, Rabat, Morocco |
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| Abstract: | This paper provides a simple and practical approach to hedging bonds that are subject to credit risk. Three new hedge ratios are derived and tested and the roles of basis risk and diversification is investigated. Empirical tests reveal that basis risk is an important factor in hedging corporate bonds. These tests identify a need for new interest rate derivatives where the underlying asset is subject to credit risk. |
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