Template-type: ReDIF-Paper 1.0
Author-Name: Mónica Pedrosa Rodríguez
Author-Workplace-Name: Facultad de Ciencias Económicas y Empresariales. Universidad Complutense de Madrid.
Title: An analysis of T-Bill and eurodollar futures as hedging instruments for loans based on prevailing T-Bill and CD 
	rates
Abstract: The purpose of this study was to determine the effectiveness of two different interest rate futures instruments 
	in hedging interest rate changes in short-term loans. In this case, the hedge ratio was obtained by using the 
	empirical method of regressing changes in the price of the spot instrument against changes in the price of the 
	futures. The interest rates on each of the short term loans to be hedged were based on the prevailing 90-day 
	T-Bill or CD rates. The terms of the loans were one month or three months. The hedging instruments used were 
	T-Bill futures and Eurodollar futures contracts. This resulted in eight different types of hedges.
	Three methods were used to compare and assess the perfonnance of the various hedging instruments: the Standard 
	Distance from Optimal Method, the Percentage Hedged Classification Method, and the Variation/Percentage Hedged 
	Matrix. The Standard Distance from Optimal Method measures the average number of basis points that the hedging 
	instrument leaves exposed in the 35-month period. The Percentage Hedged Classification Method assigns points to 
	a hedge by classifying its perfonnance as Good, Satisfactory, Marginal or Unsatisfactory. The 
	Variation/Percentage Hedged Matrix takes the results from the Percentage Hedged Classification method and relates 
	them to the variability of the cash instrument.
	Given these means of evaluation, its was deternlined that the optimal hedging strategy with the studied hedging 
	and cash instrumenls is as follows.
	Tvpe of Loan                         Hedging Tnstrument*
	One-Month T-Bill-Based Loan..........T-Bill, 1 month 
	Three-Month T-Bill-Based Loan........Eurodollar, 3 months
	One-Month CD-Based Loan..............Eurodollar, 3 months 
	Three-Month CD-Based Loan............Eurodollar, 3 months
	*Futures contract, minimum period until maturity.
	The results of this study indicate that further research is warranted to investigate the relatively higher 
	performance of longer-term hedging instruments with short-term loans.

Keywords: T-Bill.

Length: 29 pages 
Creation-Date: 1992 
Number: 92-09
File-URL: https://eprints.ucm.es/id/eprint/25877/1/9209.pdf
File-Format: Application/pdf
Handle: RePEc:ucm:doctra:92-09