Exposure of Pension Funds to Interest Rate Risk Why might pension funds be exposed to interest rate risk? How can pension funds reduce their exposure to interest rate risk?

Exposure of Pension Funds to Interest Rate Risk Why might pension funds be exposed to interest rate risk? How can pension funds reduce their exposure to interest rate risk?

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July 20, 2021
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Exposure of Pension Funds to Interest Rate Risk

Why might pension funds be exposed to interest rate risk? How can pension funds reduce their exposure to interest rate risk?

Answer and ExplanationSolution by a verified expert

Explanation
There are various strategies to hedge the risk associated with the pension fund portfolio. If the portfolio managers believe that the funds may experience a risk over the next month, they can buy or sell future options to hedge the risk. Hedging the risk is basically the shifting of risk against a premium.

Verified Answer
If the pension funds are invested in long-term, fixed-rate bonds, the market value of the portfolio inversely related to the interest rate prevailing in the market. They can reduce the interest rate risk by hedging the risk through the purchase of futures or swap options.

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