
Managing interest rate and spread through overlay
- 29 July 2024 (7 min read)
Institutional clients, such as pension funds and insurers, have a vested interest in managing interest rate and credit spread risks due to their potential impact on their financial assets and liabilities, and overall profitability. Managing credit spread risk is crucial for maintaining the stability and creditworthiness of their balance sheets as well as ensuring their solvency and financial health.
The "Key Rate Duration" approach by AXA-IM allows for a more precise assessment of interest rate and credit spread risks by measuring the sensitivity of a fixed income portfolio's value to changes in specific interest rates or credit spreads at given key maturity points along the yield curve.
This approach offers precision and reduction of basis risk, making it crucial in volatile interest rate environments particularly when the yield curve experiences non-parallel shifts such as steepening and/or flattening. Additionally, AXA-IM applies the "Wedge" approach, which offers a more realistic representation of interest rate movements. The possibility to customize scenarios, providing sophisticated modelling capabilities, allows to design fully tailored hedging strategies.
AXA-IM opts for CDS indices to mitigate credit risk exposure as they are the most liquid instruments on the credit market. The methodology involves analyzing differences in composition and sensitivity between the CDS indices and the fixed income portfolio.

Derivatives Overlay
Overlay strategies are investment techniques used to manage specific risks or enhance the performance or risk return profile of an existing investment portfolio.
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