June 22, 1998


The article Dealers' Hedging of Interest Rate Options in the U.S. Dollar Fixed-Income Market appears in the latest edition of the New York Fed's Economic Policy Review.

John E. Kambhu, an assistant vice president in the research group at the New York Fed, uses data from a global survey of derivatives dealers and other sources to estimate the potential impact of dynamic hedging by interest rate options dealers on the U.S. dollar fixed-income market.

Despite investors' willingness to hold a variety of financial assets and risks, a significant share of interest rate options exposures remains in the hands of dealers. This concentration of risk makes the interest rate options market an ideal place to explore the effects of dealers' hedging on underlying markets.

His study finds that: