tech questions on eurodollar and fed funds futures hedging
If Bank A has just longed X number of 3M eurodollar futures and if it wants to hedge away its positions by shorting Y number of 30-day fed funds futures, what would be the technical points that the bank would have to consider?
Here are a couple issues/pionts that I have come up with so far:
- eurodollar futures roll-over Would it be better off to buy futures contracts just one time (that expire after 3 months), or would it be better to buy the closest maturity contracts and roll them over 3 times?
-date mismatch(FF futures roll-over) FF futures expires every month whereas ED futures (if chosen correctly) would expire only once, meaning that FF futures MUST be rolled over or all bought in advance.
-meeting sensitivities Would there be ways to get rid of the Fed meeting sensitivity risk?
-contracts matching (X vs Y) I guess we can't buy or sell fractional amount of futures on CME. So how can Bank exactly match out the interest rate risk of the both futures contract and effectively cancel them out?
If you can guide me (abstractly or technically) how I can technically do this, or suggest me any new variables into the model, I'd be really appreciative.
You need to consider the a change in basis, a good indicator would be FRA-OIS spread. If the spread diverges from the current point, it would have to rehedge in the future. If interbank lending were to begin to freeze again, for example, the FRA-OIS spread would widen and your position would not be properly hedged.
Thanks Revsly for the help, do you know the way to say long on the LIBOR-OIS spread? Because what I might want to do is to short X number of contracts for the days in between the 3M ED futures, and adjust for the Libor-OIS spread if the spread gets changed.
So for the ED and FFF I"m effectively doing X( 100- ED) - Y(100 - FF) = C + YFF - XED
So I would want to do some Z* (ED - FF) to effectively net out the difference - but I am not sure which market i need to look into, and exactly what trades I should do.
bump
FRA-OIS is traded via swap. So if you think the spread would widen you pay on the swap. So you would pay OIS + Spread and receive Libor.
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