Area yield futures and options : risk management and hedging

Abstract

Suppose there exists a market for yield futures contracts as well as ordinary futures contracts for price. Intuitively one would think that a combined use of yield contracts and and futures price contracts ought to provide a reasonable strategy for locking in revenue. In the paper this is made precise - it is shown that revenue can be approximately locked in by a combined, dynamic use of these to markets. This procedure is perfect if the correlation between yield and price is zero. The relevant strategy is characterized: It depends only on observable price information in these two separate markets, not on the specification of parameters in utility functions of the agents involved.