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Usefulness of Treasury Bill Futures as Hedging Instruments

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  • Cicchetti, Paul
  • Dale, Charles
  • Vignola, Anthony

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.

Suggested Citation

  • Cicchetti, Paul & Dale, Charles & Vignola, Anthony, 1981. "Usefulness of Treasury Bill Futures as Hedging Instruments," MPRA Paper 45754, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:45754
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    References listed on IDEAS

    as
    1. Ederington, Louis H, 1979. "The Hedging Performance of the New Futures Markets," Journal of Finance, American Finance Association, vol. 34(1), pages 157-170, March.
    2. Holbrook Working, 1948. "Theory of the Inverse Carrying Charge in Futures Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 30(1), pages 1-28.
    3. Leland L. Johnson, 1960. "The Theory of Hedging and Speculation in Commodity Futures," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 27(3), pages 139-151.
    4. Albert E. Burger & Richard W. Lang & Robert H. Rasche, 1977. "The Treasury bill futures market and market expectations of interest rates," Review, Federal Reserve Bank of St. Louis, vol. 59(Jun), pages 2-9.
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    Cited by:

    1. Dale, Charles, 1991. "Economics of Energy Futures Markets," MPRA Paper 47447, University Library of Munich, Germany.
    2. A. D. Clare & M. C. Oozeer, 2001. "Hedging sterling eurobond portfolios: a proposal for eurobond futures contract," Applied Financial Economics, Taylor & Francis Journals, vol. 11(1), pages 37-44.
    3. Charles T. Howard & Louis J. D'Antonio, 1986. "Treasury Bill Futures As A Hedging Tool: A Risk-Return Approach," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 9(1), pages 25-39, March.
    4. Charles Dale, 1981. "The hedging effectiveness of currency futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 1(1), pages 77-88, March.
    5. Vignola, Anthony & Dale, Charles & Federal Reserve System, Federal Reserve Staffs, 1979. "Treasury/Federal Reserve Study of Treasury Futures Markets Volume II: A Study by the Staffs of the U.S. Treasury and Federal Reserve System," MPRA Paper 58897, University Library of Munich, Germany.
    6. Dale, Charles & Workman, Rosemarie, 1981. "Measuring patterns of price movements in the Treasury bill futures market," MPRA Paper 48639, University Library of Munich, Germany.
    7. Michael T. Belongia & G. J. Santoni, 1987. "Interest Rate Risk, Market Value, And Hedging Financial Portfolios," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 10(1), pages 47-55, March.
    8. Bowman, Mark John, 1985. "The use of interest rate futures by agricultural banks," ISU General Staff Papers 1985010108000017536, Iowa State University, Department of Economics.

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    More about this item

    Keywords

    Futures Markets; Hedging; Treasury Bill Futures;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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