A Blast From the Past

by Marilou Long on June 30, 2009

in Bonds,Credit Crisis

I recently pulled out my Professional Report (similar to a Master”s thesis), that was the final requirement for the MBA program at The McComb”s School of Business at The University of Texas at Austin.  It was titled Interest Rate Futures and Hedging Possibilities, and I was curious if it had any relevance to the current credit crisis.  I can”t provide a link because it was typed on a typewriter and bound.  This was 1983, and personal computers and word processing were just getting started.

From the conclusion of Interest Rate Futures and Hedging Possibilities:

Any concluding remarks on the subject of hedging with interest rate futures would have to include a discussion of various problem areas.  Specifically, a savings and loan must avoid online casino the illusion that interest rate futures provide the solution to all their interest rate risk problems.  In fact, the injudicious use of futures can get an association into a great deal of trouble.  There is a thin line between speculation and hedging, and an association which is more profit-oriented than protection-oriented in its trading can run afoul of the regulations.

An association can also get into serious financial trouble through the practice of “pyramiding”.  Pyramiding involves purchasing contracts with money withdrawn from the margin account.  This is possible because the trader is allowed to withdraw any funds in excess of the initial margin deposit when the value of the original contract rises.  However, if interest rates start to drop rapidly, the association will face margin calls and a possible severe cash drain in meeting those calls. “

This 25 year old conclusion sounds eerily fresh today.

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