More on Optimal Portfolio Choice under Stochastic Interest Rates

An investor endowed with an interest rate risk sensitive non traded cash position uses interest rate futures to maximize the expected utility of his terminal wealth. His trading strategy contains a speculative, mean-variance component and two hedge components when his utility is CARA. The second hedge is a Merton-Breeden term and is performed through a synthetic asset derived endogenously and shown to be a bond of maturity equal to the investor’s horizon.

LIOUI, A. and PONCET, P. (1998). More on Optimal Portfolio Choice under Stochastic Interest Rates. ESSEC Business School.