Interest rates have been decreasing for a number of years and are now at historic lows. This has led many pension funds to consider what their optimal level of interest rate hedging should be in such a low rate environment.
In this article we consider an often overlooked effect of the large decrease in interest rates over recent years. Due to this decrease the basis risk on the balance sheet of pension funds has increased significantly. The basis risk originates from the difference between the interest rates at which pension fund liabilities are valued and the swap rates at which the funds can hedge their interest rate risk.Author: David van BragtSee the original article (in Dutch) as published in De Actuaris »
The 2016 Johan de Witt Award for the best article published in De Actuaris (the Actuary) magazine has been awarded to David van Bragt for this article. More information (in Dutch) about this award is available here on the website of the Koninklijk Actuarieel Genootschap (the Dutch Royal Actuarial Society).
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