A Since that time there has been a virtual explosion of financial futures contracts offered and volume of contracts traded. However, it appears that most of the trading activity is being done by speculators rather than by hedgers. If this new futures market is to measure up to its stated purpose, i.e., risk reduction through hedging, then a better balance between speculators and hedgers is needed.
There are many reasons for the minimal level of hedging activity which has transpired. Many of the potential hedgers have had to seek approval from their various regulatory agencies (e.g., commercial banks, although that approval is no longer required). Others have refrained from engaging in the hedging activities of the new financial futures markets because of lack of awareness or knowledge of the mechanics of hedging. Many potential hedgers simply view any futures position as speculative. They refuse to acknowledge that remaining unhedged may be considered more speculative, given the recent volatility in interest rates.
Perhaps one reason for the apparent lack of hedging activity is the multitude of variables to choose from: the length of the hedge, the hedge ratio (percent of cash market position hedged), the contract chosen (there are approximately eight contracts to choose from at any point in time), and, finally, when to hedge and when not to hedge. It is no wonder that with this laundry list of alternatives hedging has not become a more popular method of risk management. Finally, one additional factor that may cause concern for potential hedgers is that by staying out of the futures markets opportunity losses may be incurred, but by entering the futures market real losses may be incurred.]
This article investigates the asset hedging opportunities offered by the 90-day 'Current accounting practices regarding interest rate futures contracts generally recommend an accounting procedure called mark-to-market. This procedure records unrealized gains and losses resulting from contract price changes as well as realized gains and losses in the statement of income during each accounting period. However, it is possible to defer gains and losses occurring on a futures contract used for a buy-hedge position h y including the gain or loss in the security hedged. That gain or loss would then be amortized of the holding period of the cash market instrument purchased (Arthur Anderson and Co., p. 37).