IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/3055.html
   My bibliography  Save this paper

Synthetic Eurocurrency Interest Rate Futures Contracts: Theory and Evidence

Author

Listed:
  • Annie Koh
  • Richard M. Levich

Abstract

In this paper, we develop a theoretical (arbitrage) pricing model for a Eurocurrency interest rate futures contract and measure its hedging effectiveness. This synthetic Eurocurrency interest rate futures contract is obtained by combining exisiting Eurodollar interest rate futures contracts with near term and far term currency futures contracts based on the covered interest rate parity relationship. In theory, the cash flows of the synthetic contract perfectly replicate the cash flows of a Eurocurrency interest rate futures contract. Our empirical results show that the synthetic contracts are relatively efficient in hedging non-dollar borrowing rates. These results have implications for the practice of hedging non-dollar interest rate risk and for the development of actual Eurocurrency interest rate futures markets.

Suggested Citation

  • Annie Koh & Richard M. Levich, 1989. "Synthetic Eurocurrency Interest Rate Futures Contracts: Theory and Evidence," NBER Working Papers 3055, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:3055
    Note: ITI IFM
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w3055.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Robert A. JARROW & George S. OLDFIELD, 2008. "Forward Contracts And Futures Contracts," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 11, pages 237-246, World Scientific Publishing Co. Pte. Ltd..
    2. Cornell, Bradford & Reinganum, Marc R, 1981. "Forward and Futures Prices: Evidence from the Foreign Exchange Markets," Journal of Finance, American Finance Association, vol. 36(5), pages 1035-1045, December.
    3. Richard M. Levich & E. Gerald Corrigan & Charles S. Sanford, Jr. & George J. Votja, 1988. "Financial Innovations in International Financial Markets," NBER Chapters, in: The United States in the World Economy, pages 215-277, National Bureau of Economic Research, Inc.
    4. Richard M. Levich, 1987. "Financial Innovations in International Financial Markets," NBER Working Papers 2277, National Bureau of Economic Research, Inc.
    5. Cox, John C. & Ingersoll, Jonathan Jr. & Ross, Stephen A., 1981. "The relation between forward prices and futures prices," Journal of Financial Economics, Elsevier, vol. 9(4), pages 321-346, December.
    6. Anne E. Peck, 1975. "Hedging and Income Stability: Concepts, Implications, and an Example," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 57(3), pages 410-419.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kempf, Alexander & Spengel, Christoph, 1993. "Die Bewertung des DAX-Futures: Der Einfluß von Dividenden," ZEW Discussion Papers 93-12, ZEW - Leibniz Centre for European Economic Research.
    2. Stanescu, Silvia & Tunaru, Radu & Candradewi, Made Reina, 2014. "Forward–futures price differences in the UK commercial property market: Arbitrage and marking-to-model explanations," International Review of Financial Analysis, Elsevier, vol. 34(C), pages 177-188.
    3. Joshua V. Rosenberg & Leah G. Traub, 2006. "Price discovery in the foreign currency futures and spot market," Staff Reports 262, Federal Reserve Bank of New York.
    4. Douglas Foster, F. & Lee, Adrian D. & Liu, Wai-Man, 2019. "CFDs, forwards, futures and the cost-of-carry," Pacific-Basin Finance Journal, Elsevier, vol. 54(C), pages 183-198.
    5. Lioui, Abraham, 1998. "Currency risk hedging: Futures vs. forward," Journal of Banking & Finance, Elsevier, vol. 22(1), pages 61-81, January.
    6. Björn Lutz, 2010. "Pricing of Derivatives on Mean-Reverting Assets," Lecture Notes in Economics and Mathematical Systems, Springer, number 978-3-642-02909-7, December.
    7. Suresh M. Sundaresan, 2000. "Continuous‐Time Methods in Finance: A Review and an Assessment," Journal of Finance, American Finance Association, vol. 55(4), pages 1569-1622, August.
    8. Bühler, Wolfgang & Kempf, Alexander, 1994. "Optimale Arbitragestrategien in Terminmärkten," ZEW Discussion Papers 94-10, ZEW - Leibniz Centre for European Economic Research.
    9. Jonathan Kearns, 2007. "Commodity Currencies: Why Are Exchange Rate Futures Biased if Commodity Futures Are Not?," The Economic Record, The Economic Society of Australia, vol. 83(260), pages 60-73, March.
    10. Jack S. K. Chang & Jean C. H. Loo & Carolyn C. Wu Chang, 1990. "The Pricing Of Futures Contracts And The Arbitrage Pricing Theory," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 13(4), pages 297-306, December.
    11. Berglund, T. & Kabir, R., 1995. "What explains the difference between the futures' price and its "fair" value? : evidence from the european options exchange," Other publications TiSEM 323234f7-ff9e-46bb-aa61-7, Tilburg University, School of Economics and Management.
    12. Garry J. Twite, 1993. "Effect of Stochastic Interest Rates on the Pricing of SPI Futures Contracts," Australian Journal of Management, Australian School of Business, vol. 17(2), pages 259-269, December.
    13. Philippe Raimbourg & Paul Zimmermann, 2022. "Is normal backwardation normal? Valuing financial futures with a local index-rate covariance," Post-Print hal-04011013, HAL.
    14. Gupta, Anurag & Subrahmanyam, Marti G., 2000. "An empirical examination of the convexity bias in the pricing of interest rate swaps," Journal of Financial Economics, Elsevier, vol. 55(2), pages 239-279, February.
    15. Coleman, Andrew, 2018. "Forest-based carbon sequestration, and the role of forward, futures, and carbon-lending markets: A comparative institutions approach," Journal of Forest Economics, Elsevier, vol. 33(C), pages 95-104.
    16. Garry J. Twite, 1998. "The Pricing of Australian Index Futures Contracts with Taxes and Transaction Costs," Australian Journal of Management, Australian School of Business, vol. 23(1), pages 57-81, June.
    17. Kodres, Laura E, 1993. "Tests of Unbiasedness in the Foreign Exchange Futures Markets: An Examination of Price Limits and Conditional Heteroscedasticity," The Journal of Business, University of Chicago Press, vol. 66(3), pages 464-490, July.
    18. Hodrick, Robert J. & Srivastava, Sanjay, 1987. "Foreign currency futures," Journal of International Economics, Elsevier, vol. 22(1-2), pages 1-24, February.
    19. Sah, Nilesh B. & Banerjee, Anandi & Malm, James & More, Deepak G., 2022. "A risky affair: Dual class and FX hedging," Finance Research Letters, Elsevier, vol. 47(PA).
    20. Wimschulte, Jens, 2010. "The futures and forward price differential in the Nordic electricity market," Energy Policy, Elsevier, vol. 38(8), pages 4731-4733, August.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:3055. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.