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Usefulness of treasury bill futures as hedging instruments

✍ Scribed by Paul Cicchetti; Charles Dale; Anthony J. Vignola

Publisher
John Wiley and Sons
Year
1981
Tongue
English
Weight
479 KB
Volume
1
Category
Article
ISSN
0270-7314

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✦ Synopsis

n a recent article, examined the hedging performance I of financial futures markets using a portfolio model derived from the hedging theories of . His article concluded that GNMA futures were more effective than T-Bill futures in reducing price change risk. Moreover, in the short term, the performance of T-Bill futures in reducing risk was extremely poor. The purpose of this article is to determine whether these results are due to a misspecification of the model and to test whether the hedging effectiveness of the T-Bill futures market has changed after three years of trading.

A portfolio model of hedging effectiveness is formulated to account for the constant yield price accumulation over time on Treasury bills as distinguished from price changes due to instantaneous changes in yield. We test the T-Bill futures market using the portfolio model and conclude that the market provides very good opportunities for hedging, provided that the spot position is comprised of Treasury bills deliverable against the futures contract.

THE THEORY OF HEDGING EFFECTIVENESS

While there is some disagreement as to the exact motivation of those who use the futures market for hedging,' we assume here that hedgers are solely interested in 'For a detailed discussion of the reasons for hedging, see Holbrook Working (1953).

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