Hedging Interest Rate Risk with Futures Portfolios under Term Structure Effects



    Search for more papers by this author
    • Professor of Banking and Finance, College of Business Administration, University of Georgia. The helpful comments of Professors R. Carter Hill III and David A. Edwards and an anonymous referee are gratefully acknowledged.


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.