Abstract
A hedging model based on a cubic spline interpolation methodology model automatically reflects timing differences between futures maturities and swap payment dates, actual maturities of the three-month Eurodollar deposits that underlie the futures contract, and the convexity bias defining the difference between Eurodollar futures and forward rates. The model allows futures with overlapping maturities to be used rather than limiting hedging to contracts that are part of the regular March, June, September, and December maturity cycle. Tests of the model for calendar year 2001 for both a single swap and a swap book show it to be effective in hedging the interest rate risk of LIBOR-based swaps.
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