Skip to content
All library documents

Hedging Repo Rate Exposure in Bond Derivatives

Article Quant Q&A · Author: Randor
Read the original

Summary

The document discusses how to measure and hedge repo rate exposure embedded in a bond derivative. It notes that repo rates can move with overnight indexed swap rates while still diverging enough for the repo versus OIS spread to create material risk. This means an OIS curve alone may not capture all repo exposure in a large market.

The answer points to repo rate futures as a way to hedge this spread risk and emphasizes that repo rates vary across collateral types, including Treasury, mortgage-backed and agency securities. Those differences can call for distinct contracts or risk buckets. The discussion is brief and does not specify a particular hedge ratio, valuation method, or whether repo DV01 is the standard sensitivity measure. Its guidance is therefore a general risk-bucketing principle rather than a complete hedging procedure.

Key ideas

  • Repo rates may diverge from OIS rates, creating repo versus OIS spread exposure.
  • Repo rate futures can provide a hedge for repo risk in some markets.
  • Repo rates differ by collateral type, so exposure may require separate risk buckets.
  • The document does not establish repo DV01 as a universal measure or provide a hedge sizing method.

Tags

Fixed incomeFuturesRisk management
Full text
# Hedging and measuring repo rate risk


# Hedging and measuring repo rate risk












How is repo rate risk hedged? And is repo rate dv01 the usual greek for this?

i am talking about repo risk in a derivative on a bond

## Answer by Sam4343 (score 1)

https://quant.stackexchange.com/a/30791

Repo risk is not always perfectly linked to OIS rates, although highly correlated. Therefore in large markets (say US) get a different repo curve as GC-OIS spread risk is material. This has led to repo rate futures: http://www.marketswiki.com/wiki/GCF_Repo_Index_futures http://www.dtcc.com/charts/dtcc-gcf-repo-index Would also note that repo rates from Tresury/MBS/Agency will differ and therefore have different contracts and risk buckets.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.