The evaluation of the Canadian BAX contract in managing short‐term interest rate exposure Journal Articles uri icon

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abstract

  • PurposeThe purpose of this paper is to document stylized features and market behaviour of the Canadian Bankers' Acceptance Futures (BAX) contract; and outlook for the BAX contract as the dominant instrument to manage Canadian short‐term interest rate exposure.Design/methodology/approachThe paper adopts GARCH methodology to model the time‐varying nature of the volatility of prices in the context of hedging and presents a time‐varying estimation of the hedge ratios between the BAX contract and major Canadian money market instruments.FindingsThe key finding is that the growth of the BAX Market hinges on the further development of the Canadian money market and its appeal to the international investor.Originality/valueThe paper demonstrates the suitability of the BAX contract as a tool in managing Canadian short‐term interest rate exposure for both domestic and international investors.

publication date

  • February 23, 2010