Interest rate futures and bank hedging

This note examines a situation in which hedging may actually increase a bank's exposure to risk. Especially in the case of financial institutions, there exists only a limited number of delivery dates for each futures contract and the delivery dates may not coincide with it the planning horizon of the firm. Therefore a cross-hedge often becomes necessary in financial institutions. However, a cross-hedge may increase the level of noise, and with it the banking firm's income risk.