Managing foreign interest rate risk

✍ Scribed by Robert W. Kolb; Gerald D. Gay; James V. Jordan

• Publisher: John Wiley and Sons
• Year: 1982
• Tongue: English
• Weight: 447 KB
• Volume: 2
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.3990020206

✦ Synopsis

I tion of the GNMA futures contracts in 1975. By the end of 1981, the open interest in all U S . interest rate futures markets approximated $100 billion in deliverable securities. This phenomenal growth attests to the need for such markets for the hedging of interest rate risk.

The United States is unique in the world economy for the depth and vigor of its financial markets. In spite of fledgling interest rate futures markets in Australia and Canada, pending plans for a London exchange, and an electronic exchange in Bermuda, US. interest rate futures markets are the only such markets in the world with real depth and liquidity. Since all contracts in the US. interest rate futures markets are denominated in U S . dollars, it appears that potential hedgers of interest rate risk in foreign-denominated assets have no readily available way of hedging that risk. Clearly, they face more limited hedging opportunities than does the hedger of a dollar-denominated instrument.

This article shows how traders with interest rate risk exposure in a foreign-denominated asset can use US. interest rate futures markets to hedge that risk, by trading the correct combination of US. futures in conjunction with the appropriate transaction in the foreign exchange market. These new hedging opportunities should be of great interest to internationally diversified portfolio managers, managers of multinationals, and officials of the US. futures exchanges. The results also have implications to those interested in the design and approval of new futures contracts with foreign-denominated assets as the deliverable grade.