No. of Recommendations: 1
"although the hedge would do poorly "

Hack,

You are mis-using the term. A hedge is a hedge and, therefore, by definition can't do poorly.

A textbook example of a hedge:

"It's fall and a farmer plans to plant his winter wheat soon. It will be harvested next May. The price for cash wheat now is $3.85. So he sells futures at $3.90 and plants. Come May, prices have fallen due to supply coming on the market and he only gets $3.44 for his crop. But he covers at $3.49, picking up $.41, netting him a zero opportunity cost.

(example from Lofton, "Starting in Futures", p.34.)

You think you are doing a hedge, but you are really doing something else. You are trying to game interest rates. If you were truly creating a hedge, you wouldn't care what rates did, because what you would win or lose on one leg of the hedge, you would mirror on the other, keeping you market-neutral.

If you are hell-bent on doing things fancy, what you might what to consider instead is a pairs trade.

Charlie
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