Gilt-Edged Market

5.4.7 Cross-currency spreads

The high duration characteristic of strips means that less cash is needed to invest in a

market to retain the same exposure to yield moves, giving less currency exposure compared

to holding coupon bonds. Table 5.9 shows a hypothetical example, in a positive yield curve

environment, of a US dollar-based investor who is holding the 5

3

¤

4

% Treasury 2009 gilt,

but wishes to reduce his currency risk. By switching out of the bonds into a duration-

weighted amount of 15-year strips and cash (surplus funds are deposited in short-term cash

accounts), the investor has reduced his currency risk while still being able to benefit from ...