This may be a silly question. External Interest Rate Effect and Interest Rate Management Effect are two components of the overall return to a fixed income portfolio. If the portfolio manager has hedged the interest rate risk, the two components(External Interest Rate Effect and Interest Rate Management Effect) will offset each other. – Please correct me if I’m wrong.
Nobody has corrected you, therefore you must be right.
Define offset? If you mean cancel each other’s effect, then no , that is not correct
janakisri Wrote: ------------------------------------------------------- > Define offset? > > If you mean cancel each other’s effect, then no , > that is not correct You mean external interest rate effect will not be cancelled out when interest rate management effect was designed to hedge interest rate risk?
It depends on how the mgr hedge the interest risk. It should not complete cancel each other out. Remember that the mgr contribution/Interest rate management section can be further broken down into duration, convexity and yield-curve shape change components He can do only duration hedge, two-bond hedge, key rate duration hedge… so match (offset) more (or less) closely with external interest rate. deriv108 Wrote: ------------------------------------------------------- > If the portfolio manager has hedged the interest > rate risk, the two components(External Interest > Rate Effect and Interest Rate Management Effect) > will offset each other.
Thanks, elcfa.