DISCUSSION PAPER PI-0507
Strategic Interest rate hedges or How Derivatives Can Help Solve
the Pension Fund Crisis Part II
Janwillem P.W. Engel, Harry M. Kat, Theo P. Kocken
In this paper we use a scenario-based ALM model to study the impact of
different interest rate derivatives strategies on the risk-return profile of a
defined benefit pension fund. The results show that properly constructed
hedging strategies using swaps and swaptions can add substantial value.
Increased risk perception due to fair value accounting and regulation can be
dealt with effectively via these techniques. The results are robust with respect
to the assumed interest rate mean reversion level. An expected rise in interest
rates is therefore no reason to refrain from hedging.