Hedging Interest Rate Risk with Futures Portfolios under Term Structure Effects
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- Author(s): JIMMY E. HILLIARD
- Published: Apr 30, 2012
- Pages: 1547-1569
- DOI: 10.1111/j.1540-6261.1984.tb04924.x
This study develops and tests a methodology for reducing interest rate risk in a fixed spot portfolio of assets and liabilities with default‐free cash flows. A minimum variance hedge is constructed by adding a portfolio of financial futures to the spot portfolio. Theorems are given which establish necessary and sufficient conditions for the existence of unique and zero‐variance hedges. The risk reduction characteristics of the methodology are demonstrated by an empirical analysis.