Title: Hedging with futures, an empirical study of hedging a portfolio of Greek government bonds with Euro-German bond futures

Authors: Panagiotis Christodoulou, Zaphiro Hambouri

Addresses: National Bank of Greece, Treasury Division, 68 Akadimias Street, GR 106 78 Athens, Greece. ' Alpha Bank, Risk Management Division, 45 Panepistimiou Street, GR 105 64 Athens, Greece

Abstract: Both financial and non-financial firms routinely implement hedging policies to mitigate their exposure to changes in asset prices. For a bond portfolio holder, hedging is usually accomplished using futures contracts. In Greece the Greek government regularly issues bonds of varying maturities, but there are no corresponding futures contracts. The Combination Regression-Duration model is applied to hedge a portfolio consisting of Greek government bonds with a set of Euro-German bond futures contracts. A static and dynamic hedging is also performed with three different contracts and also with only one contract. The results are found to agree with the theory of minimisation of the profit and loss variance such that dynamic is preferred to static hedge, and hedging with three different futures as opposed to hedging with just one.

Keywords: futures; derivatives; hedging; bond portfolios; government bonds; euro bonds; financial services; south-eastern Europe; Greece.

DOI: 10.1504/IJFSM.2007.011672

International Journal of Financial Services Management, 2007 Vol.2 No.1/2, pp.64 - 74

Published online: 14 Dec 2006 *

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