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Using futures contracts for corporate hedging: The problem of expiry and a possible solution
Author(s) -
Neuberger Anthony
Publication year - 1996
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/j.1468-036x.1996.tb00043.x
Subject(s) - futures contract , hedge , arbitrage , portfolio , forward market , financial economics , maturity (psychological) , forward contract , business , basis risk , market neutral , economics , asset (computer security) , actuarial science , capital asset pricing model , computer science , psychology , ecology , developmental psychology , computer security , biology
Companies using futures contracts for hedging purposes need to roll over their contracts if the maturity of their exposure exceeds that of the futures contracts. This entails basis risk that can reduce significantly the effectiveness of the hedge. In this paper an alternative form of futures contract is proposed. the contract never expires and can be used for long‐term hedging without the need for rolling‐over into a new contract. the contract is shown to be equivalent to a portfolio of conventional futures contracts of differing maturities. Its price is determined by arbitrage against the underlying asset.