Question: Immunising Interest Rate Risk using Duration & a Hedging Portfolio

• Consider a financial institution that raises 250,000 by issuing a fixed income security, 10-year term to maturity, 2% coupon rate, 2% yield to maturity.

• The ECB is expected to cut its rates by 0.25% in the next 3 months

• Construct an Immunisation portfolio using the bonds listed below which are currently trading in the sovereign bond market. - and the bond price fn. , duration, solver fn in excel. Assume settlement 10/2/2020

Maturity	Coupon	YLD	Freq
15/11/2030	2.20%	1.73%	1
15/04/2032	3.10%	2.10%	1
15/11/2036	4.10%	2.30%	1
01/12/2036	5.00%	2.32%	1
15/10/2038	2.60%	2.40%	1

What is the risk and how is it hedged?