Abstract
Due to the 2008 financial crisis, investors have become more risk averse in investing in equities and have increased their holdings in bonds as they are believed to be less risky. However, South African interest rates have been volatile over the past decade due to changes in the inflation rate. This has caused the returns of bond portfolios to be uncertain since bond prices are inversely related to interest rates. It is thus imperative to manage the interest rate risk inherent in bond portfolios so that institutional investors can achieve their mandates and targeted returns. There is not much literature or research in South Africa on the performance of bond option strategies which are used to hedge the interest rate risk inherent in bonds and this paper addresses this issue.
The objective of this study is to investigate the performance of bond option strategies over the period from 1998 to 2010 in the South African market so as to ascertain which option strategies would have performed better. A hypothetical South African government bond is used as an underlying and the performance all portfolios with an option overlay are compared to that of a bond-only portfolio. Risk-adjusted returns and cumulative performance are the basis used to compare the performance of different portfolios. Option strategies considered are protective puts, call spreads, put spreads, zero-cost collars and short fences. We found that the short fence portfolio outperformed all other portfolios including the bond-only portfolio and the call spread portfolio was the worst performer.
NDEBELE, N (2021). 3-month Bond Option Strategies: An analysis of performance from 1998 to 2010 in the South African market. Afribary. Retrieved from https://afribary.com/works/3-month-bond-option-strategies-an-analysis-of-performance-from-1998-to-2010-in-the-south-african-market
NDEBELE, NDUMISO "3-month Bond Option Strategies: An analysis of performance from 1998 to 2010 in the South African market" Afribary. Afribary, 15 May. 2021, https://afribary.com/works/3-month-bond-option-strategies-an-analysis-of-performance-from-1998-to-2010-in-the-south-african-market. Accessed 25 Nov. 2024.
NDEBELE, NDUMISO . "3-month Bond Option Strategies: An analysis of performance from 1998 to 2010 in the South African market". Afribary, Afribary, 15 May. 2021. Web. 25 Nov. 2024. < https://afribary.com/works/3-month-bond-option-strategies-an-analysis-of-performance-from-1998-to-2010-in-the-south-african-market >.
NDEBELE, NDUMISO . "3-month Bond Option Strategies: An analysis of performance from 1998 to 2010 in the South African market" Afribary (2021). Accessed November 25, 2024. https://afribary.com/works/3-month-bond-option-strategies-an-analysis-of-performance-from-1998-to-2010-in-the-south-african-market