This thesis consists of two parts. The first part is an empirical implementation of extended two factors CIR model with Korean data. It estimates the term structure with 5 different maturities in KTB (Korea Treasury Bond). Parameters for the model are estimated by MLE. We find out that data fit the model with the term structure under 3 years quite well. However, the errors are large when we use data with maturity of 5 years in sample period (2001.1.2 - 2002.12.31). The second part focuses on performance test of trading and hedge between KTB and KTF (Korea Treasury Futures) with interest rate forecasted by the model for the first half of the year 2003. Empirical results show that during a structural break period of the market the forecasting errors are significantly large and for the other period the normal error exists so the hedge strategy is ineffective in the overall test period. But except the structural break period, the model shows an appropriate direction and the volatility of interest rate process, so the trading of KTB, KTF gives the extra profits during the test period.
