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Risk management for a bond using bond put options
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This paper studies a strategy that minimizes the risk of a position in a zero coupon bond by buying a
percentage of a put option, subject to a fixed budget available for hedging. We consider two popular risk measures:
Value-at-Risk(VaR) and Tail Value-at-Risk (TVaR). We elaborate a formula for determining the optimal strike
price for this put option in case of a Hull-White stochastic interest rate model. We calibrate the Hull-White
model parameters to a set of cap prices, in order to provide a credible numerical illustration. We demonstrate
the relevance of searching the optimal strike price, since moving away from the optimum implies a loss, due to an
increased (T)VaR. In this way, we extend the results of [Ahn et al., 1999], who minimize VaR for a position in a
share.
Griselda Deelstra1, Dries Heyman2, and Mich`ele Vanmaele3 - Personal Name
NONE
Management
English
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