Hedging corporate debt with U.S. treasury bond futures

✍ Scribed by Robert C. Kuberek; Norman G. Pefley

• Publisher: John Wiley and Sons
• Year: 1983
• Tongue: English
• Weight: 560 KB
• Volume: 3
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.3990030402

✦ Synopsis

ecent articles on the hedging effectiyeness of interest-rate futures have fo-R cused on the relationship betpbeen futures contracts and their underlying cash instruments. Ederington (1979) examines the use of Treasury bill and GNMA futures to hedge the price risk in holding Treasury bills and GNMA certificates, respectively; Cicchetti, Dale, and Vignola (1981) provide an alternative test of the performance of Treasury bill futures in hedging Treasury bills; and Maness (1981) investigates buy-hedge strategies using Treasury bill futures to hedge anticipated Treasury bill purchases.

However, because changes in the market values of a wide variety of debt instruments are dominated by changes in a common term structure, the hedging potential of particular interest rate futures is not limited to the respective underIying instruments. The present study outlines a procedure for evaluating the cross-hedging effectiveness of interest-rate futures and applies the procedure to the use of Treasury bond futures to hedge the price risk of corporate debt. Our research suggests the following:

(1) Treasury bond futures offer substantial protection from unexpected changes

(2) Treasury bond futures are more effective in hedging higher-quality corpo-

(3) nearer Treasury bond futures contracts are superior to more distant con-Section I briefly motivates the study. In Section I1 we define the optimal hedge and derive the optimal hedge ratio. In Section-111 we postulate a probability model, permitting estimation of the optimal hedge ratio. Section IV outlines the estimation procedure and Section V presents our results. Finally, Section VI offers a brief summary. in corporate bond prices; rate debt than lower-quality corporate debt; and tracts in hedging corporate debt.