Duration, immunization, and hedging with interest rate futures

Duration, immunization, and hedging with interest rate futures

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Article ID: iaor201522688
Volume: 5
Issue: 2
Start Page Number: 161
End Page Number: 170
Publication Date: Jun 1982
Journal: Journal of Financial Research
Authors: ,
Keywords: investment
Abstract:

The recent advent of the interest rate futures markets has greatly enriched the hedging opportunities of market participants faced with undesired interest rate risk. The variety of futures contracts presently spans a number of instruments with different risk, maturity, and coupon characteristics. This paper modifies the concept of duration and extends the duration hedging approach to cases where futures contracts are used as the hedging instrument. The derived hedge ratios take into account differences in coupon, maturity, and risk for three different regimes. Usage of these hedge ratios should lead to more efficient hedging of interest rate risk.

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