Abstract
PurposeThe purpose of this paper is to show that the duration‐based hedge ratio has many serious defects: first, the yield‐to‐maturity is not the market interest rate, and it cannot even serve as a proxy for the market interest rate. Second, it is difficult to choose an appropriate bond for hedging among available bonds and to calculate duration. Third, duration can only be applied to small changes of interest rate. If there is a large change in interest rate, a duration‐based hedge's performance may be worse than expected. The paper proposes an improving method to solve these problems.Design/methodology/approachThe proposed design is a model‐driven enterprise system.FindingsThe proposed system integrates the complex risk management into the enterprise architecture. It can merge, import, and share resource related data across managements.Originality/valueThe paper shows how to manage the risk from both parallel and non‐parallel shifts of interest rates in the proposed system.
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