Finite hedging in field theory models of interest rates.

We use path integrals to calculate hedge parameters and efficacy of hedging in a quantum field theory generalization of the Heath, Jarrow, and Morton [Robert Jarrow, David Heath, and Andrew Morton, Econometrica 60, 77 (1992)] term structure model, which parsimoniously describes the evolution of imperfectly correlated forward rates. We calculate, within the model specification, the effectiveness of hedging over finite periods of time, and obtain the limiting case of instantaneous hedging. We use empirical estimates for the parameters of the model to show that a low-dimensional hedge portfolio is quite effective.