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Asset and Liability Management: The Banker’s Guide to Value Creation and Risk Control, Second Edition by Youssef F. Bissada, Jean Dermine

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Hedging repricing gaps with futures

In Stage 12, we noticed that the first gap of e-Bank for the coming quarter was –310 (which meant an excess of short-term deposits to reprice).

In order to protect e-Bank from an increase in interest rate, which would negatively impact the cost of funds, you could use a 3-month T-bill future contract with a delivery in the coming quarter.

This hedging strategy aims to generate a profit with the financial future that compensates the loss due to the negative gap. Should we buy or sell futures? Since we want to make a profit when the interest rate goes up (the price of bonds goes down), we would sell a future ...

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