The evaluation of the Canadian BAX contract in managing short-term interest rate exposure

John J. Siam and S.M. Khalid Nainar

Review of Accounting and Finance, 2010, vol. 9, issue 1, pages 88 - 110

Abstract: Purpose – The purpose of this paper is to document stylized features and market behaviour of the Canadian Bankers' Acceptance Futures (BAX) contract; and outlook for the BAX contract as the dominant instrument to manage Canadian short-term interest rate exposure. Design/methodology/approach – The paper adopts GARCH methodology to model the time-varying nature of the volatility of prices in the context of hedging and presents a time-varying estimation of the hedge ratios between the BAX contract and major Canadian money market instruments. Findings – The key finding is that the growth of the BAX Market hinges on the further development of the Canadian money market and its appeal to the international investor. Originality/value – The paper demonstrates the suitability of the BAX contract as a tool in managing Canadian short-term interest rate exposure for both domestic and international investors.

Date: 2010
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