A team at University College London (UCL) has evaluated the overnight process that maintains the constant maturity aspect of the GMEX Interest Rate Swap Index Average (IRSIA) Constant Maturity Future (CMF) product as an alternative to interest rate swaps (IRS).
The study, led by visiting professor Donald Lawrence, focused on analysing the cost of the end of day novation to the next day’s forward rate roll, analogous to the carry cost.
It concluded that an average year’s worth of novation cost would not be significant for any tenor during the period analysed.
It further concluded that the total lifetime cost to use the CMF as a hedge, for an asset to maturity, is also lower than the overall cost of hedging using IRS. The research sample was based on the latest available full year data (2013) for the Euro interest rate swap curve.
James Davies, chief operating officer of GMEX, says: “We are pleased to see that the UCL findings have demonstrated the cost of hedging using IRSIA CMF is demonstrably lower than using Interest Rate Swaps and that the implicit carry cost is small relative to the tick size and appears low enough to be non-frictional.”
