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A Unified Approach to Hedging Interest Rate Risk with Financial Futures *
Author(s) -
Hilliard Jimmy E.
Publication year - 1988
Publication title -
decision sciences
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.238
H-Index - 108
eISSN - 1540-5915
pISSN - 0011-7315
DOI - 10.1111/j.1540-5915.1988.tb00292.x
Subject(s) - futures contract , hedge , interest rate , position (finance) , cash , asset (computer security) , liability , simple (philosophy) , interest rate derivative , economics , computer science , actuarial science , financial economics , finance , ecology , philosophy , computer security , epistemology , biology
There is abundant literature on the use of financial futures to reduce interest rate risk. While many applications have been developed and evaluated in the literature, little has been done to provide a simple, mathematical model unifying the disparate types of hedges. The purpose of this paper is to provide such a unifying framework. Under idealized conditions, an equation is developed giving a perfect hedge solution for arbitrary choice of planning horizon, existing or planned cash market position, and asset/liability mix. The paper is pedagogic in nature.