e development of futures markets in financial instruments has provided fi-T. nancial intermediaries, among others, with a vehicle for hedging against unanticipated changes in interest rates.' Protection against these fluctuations can benefit lending institutions which have exposed themselves to interest rate risk by mismatching the maturities of their assets and liabilities. The extent of this protection is discussed by k l i n (1982), who demonstrates that hedging opportunities allow intermediaries to mismatch maturities without regard to interest rate risk or to their expectations regarding the future course of interest rates. The signiiieance of this resuh &em from the observation that borrower preferences for long-term, fixed-rate loans and investor preferences for short-term, liquid savings instruments, combined with the resulting bias toward n o d y upwardsloping yield curves, have trdithnally encouraged many intermediaries to adopt a short-funding posture-borrowing short-term funds to finance long-term loans.
S i n c e this behavior exposes lendiag institutions to the risk of rising funding costs, one would expect to observe them utilizing the futures markets to short-hedge their exposure-selling futures contracts, whose market value declines when interest rates rise more than the market anticipated?
In fact, however, financial intermediaries have generally been reluctant to utiliie futures contracts in thii manner. Some have adapted to the current envi-'For a review of the various ways in which intermediaries can utilize 6 n a n d futures, see Aspinwall (1981)
and J&ee (1981). 2The underlying notion here ii that the futures rate embodies the market's expectation of the future shortterm interest rate, so that, for in st^^^ , a simple increase in the level of interest rates would not cause the value of a futures contract to dedine unles~ the market had expected interest rates to remuin unchanged. For M empirical test of thh, proposition, see Rendeman and Carabini (1979) An implication is that the commonly held belief that Cuturea markets allow marlrat participants to "lock in" current interest rates is generally invalid.
The article has benefited &om the helpful commdnts of Richard