Chambers
inancial futures markets provide vehicles for the transfer of interest rate risks.
F It is important from a public policy perspective, and presumably from the perspective of most market participants, that the interest rate risks are reasonabIy understood and potentially controllable. Substantial effort has been devoted towards the development of hedging and immunization strategies to reduce and to control interest rate risks.
The purpose of this study is to extend a previously formulated immunization strategy for bonds into an immunization strategy for futures contracts on U.S. Government securities. The bond immunization strategy appears rather successful in reducing and virtually eliminating interest rate risks for US. Treasury notes. This study demonstrates that the immunization strategy is tractable in the case of futures contracts but does not perform an empirical test.
' Throughout most of the text, the differences between forward contracts and futures contracts are ignored. The important difference between these contracts for the purposes of this article is the daily settlement (i.e., mark-tomarket) required with futures contracts. The pricing equations which follow are strictly correct only in the case of forward contracts. Since the entire article is based on approximation techniques, it is reasonable to view the use of futures as a further approximation which should not distort the usefulness of the model's application. This issue is briefly discussed in the conclusions. For a further discussion of these issues, see Kamara (1982), especially pages 283-284.