Macro versus micro futures hedges at commercial banks

Commercial banks have been relatively slow to enter interest rate futures markets, and one problem area that has received a considerable amount of attention has been whether a bank should use a macro or micro hedging approach. Macro hedges are considered transactions to make the entire bank insensitive to unexpected changes in interest rates, while micro hedges are hedges of particular or well-defined categories of assets or liabilities. A study of the Portfolio Strategy and the Price Sensitivity Strategy for 4 different cases suggests several points: 1. The macro hedging approach dominates the micro approach under restrictive assumptions. 2. The aim of any hedging program must be to control the risk of the bank as a whole. 3. Since full information is not available, perfect macro hedges cannot be expected. 4. The accounting strictures presently in force are sufficiently strong to require micro hedges. Therefore, a bank should adopt the strategy of attempting to determine its best macro hedge position and then implementing that overall hedged position by a series of micro hedges tied to individual assets.