In this chapter we develop the GAMS models for structuring index funds. The development is based on the discussion of Chapters PFO-7 and PFO-10. The following models are discussed in this chapter and the GAMS source code for each is given in the associated FINLIB files:
Structural index funds implements a model for creating an index fund of fixed-income securities by matching two risk factors, duration and currency, based on Section PFO-7.3.1.
Co-movement index funds implements a model for creating index funds by minimizing the tracking error between the portfolio return and the target index, based on Section PFO-7.3.2.
Selective hedging for index funds creates an indexation model that provides hedging for the exchange rate risk of an international portfolio, based on Section PFO-10.5.
We implement and test the GAMS models of this chapter using two data sets stored in Excel files:
BondIndexData.xls contains 500 simulated returns of 254 bonds from three different countries, the United States, Germany, and Switzerland. It also contains scenarios of the USD/DEM and USD/CHF exchange rate, and of the return of the target index.
BroadIndexData.xls contains monthly return data for 10 asset classes over a 10-year period, including cash, stock and bond indices from the international markets. We also provide monthly data of the exchange rates covering the same period.
We use the utility ...