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Dynamic hedging of paper with T bill futures

✍ Scribed by Koutmos, Gregory; Pericli, Andreas

Publisher
John Wiley and Sons
Year
1998
Tongue
English
Weight
197 KB
Volume
18
Category
Article
ISSN
0270-7314

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✦ Synopsis

Despite the growing importance of the commercial paper market there is no empirical work investigating the hedging performance of dynamic hedging strategies versus traditional static hedging strategies. This article proposes a dynamic hedging model for commercial paper that takes advantage of time dependencies present in the joint density of commercial paper and T-bill futures. The hedging effectiveness of the dynamic model is compared to that of the static regression model. There is clear evidence that dynamic hedging is superior to static hedging in terms of both total variance reduction and expected utility maximization. These results hold even when transactions costs are explicitly taken into account.

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