The use of Derivatives to Hedge the Bond Portfolio

The aim of this master`s dissertation is to compare several hedging strategies for Russian corporate bond portfolio. I analyze hedge with OFZ futures contract and evaluate the hedging effectiveness of different models. The empirical analysis includes duration approach, duration adjusted approach, minimum variance approach, constant conditional correlation (CCC) multivariate GARCH models, and Bayesian hedging strategy, attempting to combine the strengths of minimum variance and GARCH models, thereby endogenizing the dilemma of selecting the best estimation model. Empirical results demonstrate that the Bayesian composite hedging strategy achieves the highest hedging effectiveness and compares particularly favorable to minimum variance during the estimation period. However, capturing these benefits requires low transactions cost and efficiently functioning futures markets. The remainder of the master`s dissertation is organized as follows. In introduction I explain aims and problems of this study. In chapter 1, I review the literature on hedging strategies and describe methodology of hedging and futures. Chapter 2 provides analyses of corporate bond portfolio and hedging instruments. In chapter 3 I describe the methodology used in my analyses and discuss empirical results. In conclusion I sum up results of the study and provide some suggestions.