Hedging Canadian Corporate Debt: A Comparative Study of the Hedging Effectiveness of Canadian and U.S. Bond Futures
Posted: 19 Sep 2004
Abstract
The Toronto Futures Exchange introduced interest rate futures contracts in September 1980 to provide Canadian market players with the ability to hedge their positions against interest rate fluctuations. Instruments for both ends of the term structure were introduced: A 91-day Government of Canada Treasury Bill Futures contract for the short end and, for the long end, a Long Term Government of Canada Bond Futures contract. The motivation for the creation of these instruments was to eliminate currency risks faced by Canadians trading in the U.S. markets. By the same token, the dangers associated with the asymmetries in monetary and fiscal policies or in borrowing calendars between the two countries were to be eliminated. Unfortunately, these contracts have not met the resounding success of their American counterparts. In the first few years after their inception, almost all available maturities were traded daily. Today, only the current month's contract is traded, if at all, casting some doubts on the potential of the Canadian instruments for hedging Canadian portfolios.
Keywords: hedging, cross-hedging, derivatives, futures, bond futures, international finance, cross-border, Canada, U.S.
JEL Classification: G10, G13
Suggested Citation: Suggested Citation