Hedging Interest Rate Risk With Financial Futures

In the period of volatile interest rates since 1979, many businesses have sought to lower their exposure to interest-rate risk, which is the probability that profits and values will be adversely affected by changes in market interest rates. The thrift industry has particularly been damaged by interest-rate risk. By borrowing short-term and lending long-term, liabilities repriced or matured faster than assets, which cause a classical earnings squeeze. The Federal Home Loan Bank, the regulatory agency for the thrifts, has set into law regulations authorizing individual thrifts to utilize financial futures as a tool to reduce interest-rate risk. The central issue of this paper is that interest rates risk needs to be managed. One thing certain about interest rate is that they either go up or down. Hedging with financial transfers that risk to someone else