Bank size, transaction costs, and optimal macrohedging with financial futures

Abstract

While interest rate uncertainty continues to challenge bankers, the use of financial futures to hedge interest rate risk attracts increasing attention. Recent research studies investigate two hedging strategies. A micro hedge which ties the futures position to a specific category of assets or liabilities, and a macro hedge which is designed to hedge a bank's total exposure to interest rate risk. The results suggest that microhedging is easier to implement. In addition, current institutional, regulatory, and accounting practices encourage microhedging activities.