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Hedging Interest Rate Risk with Futures Portfolios under Term Structure Effects
Author(s) -
HILLIARD JIMMY E.
Publication year - 1984
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1984.tb04924.x
Subject(s) - futures contract , portfolio , hedge , econometrics , term (time) , economics , interest rate , replicating portfolio , variance (accounting) , cash , spot contract , portfolio optimization , actuarial science , financial economics , finance , ecology , physics , accounting , quantum mechanics , biology
This study develops and tests a methodology for reducing interest rate risk in a fixed spot portfolio of assets and liabilities with default‐free cash flows. A minimum variance hedge is constructed by adding a portfolio of financial futures to the spot portfolio. Theorems are given which establish necessary and sufficient conditions for the existence of unique and zero‐variance hedges. The risk reduction characteristics of the methodology are demonstrated by an empirical analysis.