International hedge of fixed-income contracts

The fixed-income literature is concerned with hedging strategies for contro lling the interest rate risk of assets and liabilities held domestically in a single currency. That there is little research dedicated to internationa l immunization may reflect a view that companies and financial institutions dealing internationally need only replicate a single-currency hedging stra tegy ill each country. The authors argue that separate immunization in each country is overly restrictive and may be costly to execute. Instead, they propose a less restrictive strategy treating the assets and liabilities hel d across currencies as portfolios, and matching the duration of those portf olios. Their immunization strategy should directly reduce the cost of inter national hedging against interest risk, and indirectly reduce the cost of h edging against currency risk. Simulation results suggest that the proposed strategy should be at least as effective as well as cheaper to implement.