Under stochastic interest rates, we examine the case of a “ pure ”, infinitely risk-averse hedger endowed with a fixed position in a long term bond. Unlike conventional wisdom, which states that the difference between hedging through forwards and futures is immaterial, the minimum variance hedge ratio using forwards is shown to comprise two terms instead of one only when using futures, due to the presence of an additional risk that bears on the forward profit-and-loss statement.
LIOUI, A. and PONCET, P. (1998). The Minimum Variance Hedge Ratio Revisited with Stochastic Interest Rates. ESSEC Business School.