Macro versus micro futures hedges at commercial banks

✍ Scribed by Robert W. Kolb; Stephen G. Timme; Gerald D. Gay

• Publisher: John Wiley and Sons
• Year: 1984
• Tongue: English
• Weight: 437 KB
• Volume: 4
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.3990040106

✦ Synopsis

Introduction

espite the fact that 100 of the largest banks in the United States now make D some use of the interest rate futures markets (see Morris, 1983), banks have been relatively slow to enter these new markets. One of the problem areas that has received a considerable amount of attention has been whether a bank should use a "macro" or "micro" hedging approach. Much of the disagreement over the proper course of action has turned on a misunderstanding of the terms "macro" and "micro" themselves.' This article seeks to resolve the controversy and show under what circumstances each type of hedge will be appropriate. As usual, there is truth in both positions.

11. COMPARING MACRO AND MICRO HEDGES

Macro hedges are usually thought of as transactions to make the entire bank insensitive to unexpected changes in interest rates. Often this insensitivity to interest rates is conceived of in terms of "controlling the gap" or in terms of spread management.2 Micro hedges are hedges of particular or well-defined categories of assets or liabilities such as a particular bond, or more broadly, a portfolio of CD liabilities.

Accounting difficulties and informational requirements are among the most 'See various issues of the American Banker for this continuing debate, notably Dew (1982) and Poltz (1982). 'See Simonson and Hempel (1982) and Olson and Simonson (1982) for a recent discussion of gap management.