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Dynamic hedging - comparing alternative hedging approaches for an interest rate derivatives portfolio
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In this study, we compare a widely used delta-hedging strategy with a more complex delta-gamma-hedging approach when applied to an interest rate derivatives portfolio composed of interest rate swaps, caps, floors and swaptions. In order to replicate the portfolio, we use market traded futures contracts on German bunds with two different maturities, 15-and 30-years. Even though a delta-gamma-hedging should always be more accurate than a simple delta-hedging, we reveal a practical situation where that does not appear to happen. We suggest that two possible explanations for this result may be based on the instruments’ payoff nature.1
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Delta-hedging Delta-gamma-hedging Interest rate derivatives