Financial futures hedges typically use one futures market (e.g., a 10-year-note
futures to hedge a position in 10-year U.S. Treasury securities). This article
reports tests of combination hedges composed of 10-year-note futures and
long-bond futures to hedge 10-year Treasuries and compares combination hedges
with the standard one-market hedge. The study applies to the U.S. market an
approach developed and tested successfully for the German bond market.
Combination hedges are generally found to be superior. Of three methods examined
for determining hedge ratios—using yields, option-adjusted modified
durations, or non-option-adjusted modified durations—combination hedge
ratios derived from option-adjusted modified durations performed best.