Fixed Income - liability-based strategies under various interest rate scenarios

[Tincup1]

Hello,

Overhedging is helpful in a rising interest environment when DA>DL, then Overhedging long position has to be the net position of contracts?

and how I related the above statement with reducing hedging ratio when rates are expected to go up

Thank you

[S2000magician]

@Tincup1

Overhedging is helpful in a rising interest environment when DA>DL . . . .

When money duration of assets is greater than money duration of liabilities, not merely duration of assets and duration of liabilities.

@Tincup1

then Overhedging long position has to be the net position of contracts?

I’m not sure what you mean by “net position” of contracts. Presumably, all of the contracts will be in the same direction (i.e., all long or else all short).

@Tincup1

and how I related the above statement with reducing hedging ratio when rates are expected to go up

I’m not sure what you mean here.

[Tincup1]

then Overhedging long position has to be the net position of contracts?

I want to ask net position in overhedging = instrument which will decrease the duration of the portfolio of assets so that the loss on assets/(portfolio of bonds) should be less.

Then why we are overhedging? It has to be underhedging based on how I am delineating it. There is some gap in my understanding.

That’s why I asked how I should relate the above explanation to the concept provided in the CFA book,“Reducing hedging ratio when rates are expected to go up”