Hedging Futures Options with Stochastic Interest Rates

Hedging~interest Rate Risk with Options on Average Interest Rates

MARCH 1995 Hedging interest rate risk has become one of the most common and important types of a financial manager's risk management activities. A classic example is for a firm to hedge its cost of funds by using an interest rate cap to place an upper bound on its borrowing costs. The hedge typically consists of a sequence of individual call options on the interest rate, with option expiration ...

Hedging Downside Risk: Futures versus Options

Area Yield Futures and Futures Options: Risk Management and Hedging

Imagine there exist markets for yield futures contracts as well as ordinary price futures contracts. • Intuitively one would think that a combined use of yield futures contracts and price futures contracts ought to provide a reasonable strategy for insuring revenue. • In the paper this idea is made precise. It is shown that revenue can be secured in by a combined replication of these two contra...

Catastrophe options with stochastic interest rates and compound Poisson losses

We analyze the pricing and hedging of catastrophe put options under stochastic interest rates with losses generated by a compound Poisson process. Asset prices are modeled through a jump-diffusion process which is correlated to the loss process. We obtain explicit closed form formulae for the price of the option, and the hedging parameters Delta, Gamma and Rho. The effects of stochastic interes...

Stochastic Convenience Yield, Optimal Hedging and the Term Structure of Open Interest and Futures Prices

This paper develops a dynamic, equilibrium model of a futures market to study optimal hedging and the term structure of open interest and futures prices. Investors continuously face spot price risk over time and attempt to hedge this risk using futures. Convenience yield shocks generate basis risk to rolling over near-to-maturity futures. Hence, investors need to simultaneously trade far-from-m...