Picking Your Spots on the ED Strip: A Graphical Guide to “Quick and Dirty” Hedging For Treasury Notes

Overview: The objective in this study is to identify those one-shot transactional devices in the ED strip – bundles, packs, or individual contracts – that afford the greatest, most reliable short-term price protection for on-the-run Treasury notes. Operationally, “greatest” means those ED futures packages whose price changes are most highly correlated with clean) price changes in Treasuries. To prevent outlier price moves from exerting disproportionate influence upon the conclusions, it uses nonparametric Spearman rank correlation instead of the more familiar Pearson correlation. Reliable” means estimating these correlations over a span of history long enough to comprise several market environments – bullish, bearish, stable, and volatile. Thus, we use daily (close-to-close) price changes for the three and- a-half years from 4 January 1994 to 16 June 1997. The convention it follow in identifying members of the ED futures strip is to assume that market participants roll out of the current quarterly delivery cycle into the deferred cycle on the last business day of the month before the current cycle’s expiration. Thus, for example, on the last business day of August 1997 we would shift Red1 status from the Sep 98 contract to the Dec 98 contract, and so on for all other delivery months. Note that the CME lists two sets of bundles in tandem for approximately one month out of every quarter: Specifically, around one month prior to expiration of the front-month Eurodollar contract (e.g., the Sep-Dec-Mar- Jun cycle), the Exchange simultaneously lists a second set of deferred bundles (e.g., the Dec-Mar-Jun-Sep cycle).

(Is this item miscategorized? Does it need more tags? Let us know.)

Format: PDF | Size: 239KB | Date: Jan 2003 | Pages: 13