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Managing interest rate risk quantitatively
A program developed by quantitative specialists
The success of our COM (hedging of currency risk) and QuAM (tactical asset allocation) quantitative products, have naturally led us to develop a product that systematically hedges interest rate risk, taking market trends into account. This programme, called “IROM” (Interest Rate Overlay Management) is dynamic, while focusing on risk control.
In this context, quantitative models systematically spot market trends and generate directional signals that accompany the spotted trends, without trying to predict them.
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Objectives
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To reduce the financing rate of the managed line
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To exploit trends in the interest-rate market
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To control risk by reducing the volatility of managed lines via a stop-loss system
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To diversify management of debt (quantitative management decorrelated from a fundamental approach)
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Priority to controlling risk
This approach is based on a rigorous, automatic and objective method that avoids the randomness of predictions and the emotional nature of decisions.
Hedges are shifted dynamically on the basis of trends detected by the programme. No leverage is authorised. The programme cannot set up hedges that increase risk or that exceed the amount or maturity of the underlying asset.
It is important to note that risk is controlled through a series of mechanisms, including stop-loss levels, which minimise losses in the event that interest rates move in the opposite direction than forecast, and active order levels to consolidate gains in the event of a market downturn.
The hedging programme must be integrated with or linked to:
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either a underlying bond portfolio, in order to generate positive returns in the event that interest rates rise,
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or to a fixed or floating rate loan, in order to reduce financing costs, while limiting the volatility of interest expenses.
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