Support for choosing futures and options strategies

Article Abstract:

Two of the three ways to hedge against interest rate risk are examined: options and financial futures. (The third method for hedging is interest swaps, which is not discussed.) The first step in hedging is identifying what to hedge, by analyzing short-term investments and other investments vulnerable to interest rate fluctuations, such as corporate bonds and government securities. The second step is identifying the hedging instrument to use. The most commonly used instruments are: 90-day Treasury bills, Treasury notes, bonds, and Eurodollar deposits. Next, linear regressions are used to develop correlations (the most common used is R2), or the coefficient correlation. Managing basis risk also requires near-constant monitoring of the market. Oscillation as a technique for monitoring market changes is described and explained. After deciding which security should be hedged using either options or futures, the hedge ratio must be computed. Again, these computations are briefly explained. As to whether options of futures should be used, investors should keep in mind that losses on options are limited to their option premium or the cost of the option, whereas futures may provide larger gains or losses. There are also pricing models that can help in deciding between the two alternatives. The most commonly used pricing models are: Black-Scholes, and Cox, Ross, Rubenstein models. Other aspects of hedging (including legal rules of linking hedging gains to the hedged asset) are discussed.

Methods, Analysis, Software, Risk (Economics), Options (Finance), Investments, Risk management, Hedging (Finance), Financial futures, Interest rates

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Anatomy of the great treasury workstation fizzle

Article Abstract:

Computer workstations designed for use in treasury operations have not lived up to expectations. Shortcomings in each of the workstation's major functions have limited the workstations' appeal. Spreadsheets for cash forecasting and management are commonly used by treasury departments, but workstation software that allowed balance reporting system data to be loaded into spreadsheets was priced too high. Workstations do not allow easy entry of account analysis data from other computers. Workstation debt and investment portfolio management functions make no significant advances over excellent, less expensive portfolio management software already on the market. Treasury departments have been reluctant to invest the time and money needed to customize bank relationship maintenance software for use on workstations.

Accounting, Technology application, Workstations (Computers), Independent treasury

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