Risk Management With Derivatives by Dealers and Market Quality in Government Bond Markets

Topics:
Investment and Capital Markets
Tags:
Bond,
Dealer,
Derivatives,
Finance,
Government,
Investment,
London Business School,
Risk Management
Source:
London Business School

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Overview: This paper investigates how bond dealers manage their core business risk with interest-rate futures and the extent to which market quality is affected by their selective risk taking. The paper observes that dealers use futures to take directional bets and to hedge the changes in their spot exposure. However, this risk control takes place via the futures market and not the spot market. Finally, the paper finds strong support for the price effects of capital constraints emphasized by Froot and Stein (1998).

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Format: PDF | Size: 287KB | Date: May 2002 | Pages: 47

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