Hedging sterling eurobond portfolios: a proposal for eurobond futures contract

Options and futures on government bonds are the only exchange traded derivative contracts currently available to investors wishing to hedge portfolios of eurobonds. This study, forms sterling denominated eurobond portfolios and tests the hedging effectiveness, with respect to these portfolios, of the long gilt futures contract traded on the London International Financial Futures Exchange (LIFFE). Also testing the hedging effectiveness of a futures contract- a Eurobond Index Futures (EIF) contract. Finding the hedging effectiveness of the Long Gilt contract to be inferior to that of the EIF contract. Given the size and importance of the eurobond market, it is therefore believed that it is time to develop purpose built derivative contracts for these capital instruments.