One unique type of exposure that many financial institutions and corporate treasuries encounter is repetitive or recurring interest rate or price exposure. When one is faced with repetitive or recurring interest rate exposure, a question arises as to which expiration month futures contracts should be employed to hedge against this type of exposure. With regard to this issue at least two alternative hedging strategies are available; a stack (rollover) hedge and a strip hedge (Kawaller (1991)). Under a stack hedge, at any point in time, positions on futures for all future exposures are undertaken only on the nearby contract. As time progresses, futures positions on the previous contract are rolled over to the next nearby futures contract. Futures positions are thus initiated on multiple dates under this strategy. Under a strip hedge, positions on futures are spread over successive months, undertaking all the positions on a single initial date. Strip hedges have become an option as trading in more distant delivery contracts has become available. The total number of contracts traded under the stack hedge is greater than under the strip hedge.; The purpose of this dissertation is twofold. First, to fully layout the conceptual issues in order to examine how different factors (i.e., basis, risk premium, calendar spread, transaction costs etc.) related to liquidity and pricing considerations influence the risk/return characteristics of the alternative hedging strategies. Second, to investigate empirically the effectiveness of these strategies in managing repetitive interest rate exposure with Eurodollar futures contracts.; The empirical investigation examines the historical performance of the three alternative hedging strategies over the period December 1, 1983--February 28, 1999. The alternative strategies are evaluated against four evaluation criterions that are based on different hedging objectives (return maximization, risk minimization, risk-return optimization and target rate realization). In addition, under each hedging objective we examine the factors that contribute to the differences in the performance of the hedging strategies. The ex-post effectiveness of alternative hedging strategies is tested by simulating quarterly cost of a representative bank's loanable funds used to finance a series of hypothesized fixed-rate loans. Three alternative hedge periods/loan terms are considered: (1) a two-quarter period; (2) a four-quarter period; and, (3) a six-quarter period. Under each hedge period, overlapping and non-overlapping samples are examined.
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