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Bridge over ocean
1 September 1992 Financial Analysts Journal Volume 48, Issue 5

Choosing the Best Interest Rate Hedge Ratio

  1. Ira G. Kawaller

A minimum variance methodology (which, by definition, results in minimum risk hedge ratios) does not produce minimum uncertainty hedge ratios. This seeming dichotomy arises because regression based methodologies result in effective interest rates that are path dependent. In contrast, under appropriate assumptions, a value of a basis point methodology will produce an outcome that is not path dependent.

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