Michael T. Belongia and G. J. Santoni discuss the problem of interest rate risk facing depository institutions in an era of financial deregulation and volatile interest rates. The authors use simple examples to show how changes in interest rates affect a depository institution’s equity value. Because share owners are interested in protecting their wealth, some institutions have initiated efforts to hedge the value of their equity. Belongia and Santoni then discuss the economic principles of hedging the interest rate risk of a financial portfolio with futures contracts. They show how interest rate risk can be measured and, based on that measurement, how futures contracts can preserve a given equity value whether interest rates rise or fall. The examples also illustrate that a variety of cash flows are consistent with a true hedge based on insulating a firm’s equity. This result is important because many hedging strategies are designed to maintain a fixed cash flow. While this may be important for some management purposes, such a strategy will often result in a hedge that does not protect the wealth of share owners. Therefore, focusing attention solely on cash flows, as many hedging strategies seem to do, will often result in a hedge that does not protect equity.