Usefulness of Treasury Bill Futures as Hedging Instruments

Paul Cicchetti, Charles Dale and Anthony Vignola

MPRA Paper from University Library of Munich, Germany

Abstract: In a recent article, Ederington (1979) examined the hedging performance of financial futures markets using a portfolio model derived from the hedging theories of Stein (1961) and Johnson (1960). 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.

Keywords: Futures Markets; Hedging; Treasury Bill Futures (search for similar items in EconPapers)
JEL-codes: G11 G13 G14 (search for similar items in EconPapers)
Date: 1981
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Published in Journal of Futures Markets 3.1(1981): pp. 379-387

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