Skip navigation
Title: Hedging the Interest Rate Risk of Brady Bonds
Authors: Jacob, Boudoukh
Richardson, Matthew
Whitelaw, Robert F.
Issue Date: 3-Jul-1996
Series/Report no.: FIN-96-016
Abstract: While there is significant interest in investing in Brady bonds, the source of attraction is often the exposure to sovereign risk (and its yield compensation), while the exposure to U.S. interest rate risk is a “necessary evil”. This paper addresses the problem of determining the interest rate sensitivity of Brady debt. WE show that the most relevant state variables in determining the duration of a Brady bond are U.S. interest rates and the bond’s strip spread. Motivated by the difficult of using structural models to price and hedge Brady debt, we provide a model-free approach to estimating the hedge ratio. Using our approach to hedge the Argentinian Par and Discount Brady bonds, we find that only a small fraction (15% or so) of the total risk is hedgeable, but our hedged portfolio exhibits little covariation with U.S. interest rates.
URI: http://hdl.handle.net/2451/26962
Appears in Collections:Finance Working Papers

Files in This Item:
File Description SizeFormat 
wpa96016.pdf951.01 kBAdobe PDFView/Open


Items in FDA are protected by copyright, with all rights reserved, unless otherwise indicated.