Synthetic Eurocurrency Interest Rate Futures Contracts: Theory and Evidence

52 Pages Posted: 14 Apr 2007

See all articles by Annie Koh

Annie Koh

Singapore Management University; Singapore Management University - Business Development and External Relations

Richard M. Levich

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: August 1989

Abstract

In this paper, we develop a theoretical (arbitrage) pricing model for a Eurocurrency interest rate futures contract and measure its hedging effectiveness. This synthetic Eurocurrency interest rate futures contract is obtained by combining exisiting Eurodollar interest rate futures contracts with near term and far term currency futures contracts based on the covered interest rate parity relationship. In theory, the cash flows of the synthetic contract perfectly replicate the cash flows of a Eurocurrency interest rate futures contract. Our empirical results show that the synthetic contracts are relatively efficient in hedging non-dollar borrowing rates. These results have implications for the practice of hedging non-dollar interest rate risk and for the development of actual Eurocurrency interest rate futures markets.

Suggested Citation

Koh, Annie and Levich, Richard M., Synthetic Eurocurrency Interest Rate Futures Contracts: Theory and Evidence (August 1989). NBER Working Paper No. w3055. Available at SSRN: https://ssrn.com/abstract=979952

Annie Koh

Singapore Management University ( email )

Administration Building
81 Victoria Street
Singapore, 188065
Singapore

Singapore Management University - Business Development and External Relations ( email )

81 Victoria Street
Admin Bldg, Level 5
Singapore, 188065
Singapore

Richard M. Levich (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0422 (Phone)
212-995-4256 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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