Hedging money market CDs with treasury-bill futures

✍ Scribed by Jack W. Parker; Robert T. Daigler

• Publisher: John Wiley and Sons
• Year: 1981
• Tongue: English
• Weight: 585 KB
• Volume: 1
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.3990010403

✦ Synopsis

A other financial institutions. The introduction of money market certificates of deposit (MMCDs) provided a vehicle where small investors may purchase CDs with a relatively small cash investment. Unusually high interest rates during the recent past convinced many of these investors to switch funds from low-interest savings accounts to high-interest MMCDs. Moreover, the volatility of interest rates has increased substantially during the past several years. Consequently, when the bank's assets are primarily in fixed-rate long-term loans and fixed-rate long-term investment securities, the financial institution has a locked-in interest rate for the long-term assets, but is subject to changing short-term interest rates as the MMCDs roll over each six months at the current short-term rate. When the short-term rate rises above the long-term loan rate, the bank income statement undergoes substantial strain.

To overcome the problem described above, one may lock in the short-term interest rate when rates are anticipated to rise by employing a hedge via the Treasury-bill futures market. This article discusses how a financial institution may employ T-bill futures to hedge asset-liability "gaps" caused by MMCDs, including the procedure to implement such a hedge program, an example, and data requirements to satisfy information needs for the bank's board of directors and the regulatory agencies.