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

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.