Economic considerations in the use of interest rate futures

Franckle, Charles T.; Senchack, Andrew J.

doi:10.1002/fut.3990020111

Cited by 13 publications

(4 citation statements)

References 8 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…In an earlier article appearing in this Journal, Franckle and Senchack (1982) presented arguments as to why the most promising use of financial futures s e e m to be the hedging of an antic&ated rather than an existing cash position. On the other hand, hedging literature on the traditional commodity markets has focused primarily on situations in which a hedger had an actual cash position or was dealing with a storable commodity.…”

Section: An'itcipatory Hedging With Interest-rate Futuresmentioning

confidence: 99%

Cross hedging CDs with treasury bill futures

Senchack

Easterwood

1983

Journal of Futures Markets

Self Cite

View full text Add to dashboard Cite

oday's volatile and uncertain financial environment has spurred prudent T managers to seek out new and more sophisticated financial planning tools to cope with their more complex financial problems. This awakening need for a more effective risk-trader mechanism to protect against the growing uncertainty and volatility of interest rates directly led to the development of interest-rate futures. The recent emergence and rapid growth of interest-rate futures markets provides financial instituhs with a new planning tool which can potentially reduce uncertainty and lower risk exposure in the formulation and implementa- bank funds manager is taken who desires to issue CDs as part of his liability management program. Data will be analyzed on a weekly basis since most managers do not trade on a daily basis. Furthermore, taxes and foregone interest on variation margin calls will be ignored; however, transactions cost will be taken into account.One may question why cross hedging with T-bil futures should even be considered when a futures contract for domestically issued CDs has recently become available. The question is one of liquidity. If the CD futures market were sufficiently liquid, then the direct hedge should be chosen to avoid risk of loss from spread changes between the two markets. If it is not sufficiently liquid, then hedgers might select the cross hedge in the T-bill futures contract.

show abstract

Section: An'itcipatory Hedging With Interest-rate Futuresmentioning

confidence: 99%

Cross hedging CDs with treasury bill futures

Senchack

Easterwood

1983

Journal of Futures Markets

Self Cite

View full text Add to dashboard Cite

show abstract

“…Research on hedging the interest rate exposure of financial portfolios generally has evaluated the performance of hedge ratios based on one of two criteria. Cicchetti, Dale, and Vignola (1981), Ederington (1979), Franckle (1980), Franckle and Senchack (1982), and Koppenhaver (1984) have developed hedge ratios for particular assets (liabilities) that adjust for basis risk—the risk that the spread between the prices of the futures and cash instruments may change during the period of the hedge. A second group of studies has developed “optimum” hedging strategies for assets and liabilities of different duration.…”

Section: Introductionmentioning

confidence: 99%

Interest Rate Risk, Market Value, and Hedging Financial Portfolios

Belongia

Santoni

1987

J of Financial Research

View full text Add to dashboard Cite

This paper derives theoretical hedge ratios for the financial portfolio that preserve its present value in the presence of interest rate risk. From a practical point of view and for any given portfolio, the existence of the financial futures market allows the investor to employ any of a number of different hedges, each of which approximately satisfies the theoretical condition. The theory indicates that wealth-preserving hedges depend on the interest elasticities (durations) of the spot assets and liabilities contained in the portfolio, portfolio leverage, and the interest elasticity (duration) of the financial instrument underlying the futures contract that is employed in constructing the hedge. Also, hedges designed to maintain net interest margin or net cash flow do not minimize exposure to interest rate risk.

show abstract

“…The same criticism applies to a variation on the basic portfolio model developed by Franckle and Senchack (1981). Parker and Daigler (1981), however, directly address the effectiveness of T‐bill futures in hedging the gap between a bank's rate‐insensitive assets and rate‐sensitive liabilities.…”

Section: Introductionmentioning

confidence: 99%

Selective Hedging of Bank Assets With Treasury Bill Futures Contracts

Koppenhaver

1984

J of Financial Research

View full text Add to dashboard Cite

The recent volatility of interest rates, the associated profit pressures imposed on banks, and the surge in the development of new contracts have stimulated a desire to understand and apply financial futures hedging to banking operations. This paper models interest rate futures contracts in a theory of bank behavior to illustrate the hedging of bank loans as well as government securities. The model predicts the hedge will be greater (1) the greater the expected rise in interest rates and (2) the greater the effect of disintermediation on bank deposits. A simulation of the financial futures trading strategy is reported for banks of various asset sizes using data from the Eleventh Federal Reserve District. Depending on bank risk aversion and interest rate expectations, hedging the bank's total interest rate exposure with T-bill futures reduces the variability of unhedged profits by 80 percent.

show abstract

Economic considerations in the use of interest rate futures

Cited by 13 publications

References 8 publications

Cross hedging CDs with treasury bill futures

Cross hedging CDs with treasury bill futures

Interest Rate Risk, Market Value, and Hedging Financial Portfolios

Selective Hedging of Bank Assets With Treasury Bill Futures Contracts

Contact Info

Product

Resources

About