NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Synthetic Eurocurrency Interest Rate Futures Contracts: Theory and Evidence

Annie Koh, Richard M. Levich

NBER Working Paper No. 3055
Issued in August 1989
NBER Program(s):   ITI   IFM

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.

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Document Object Identifier (DOI): 10.3386/w3055

Published: Japan, Europe, and Internaitonal Financial Markets: Analytical and Empirical Perspectives, 1994, Ed. Ryuzo Sato, Richard M. Levich, Rama Ramachand Cambridge University Press: New York, pp.147-175.

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