Currency & Interest Rate Futures

Published on May 2016 | Categories: Types, Presentations | Downloads: 35 | Comments: 0 | Views: 343
of 64
Download PDF   Embed   Report

International Financial Management by P G Apte Chapter 9 Presentation

Comments

Content

CURRENCY AND INTEREST RATE
FUTURES

CURRENCY FUTURES
• A futures contract, like a forward contract is an agreement
between two parties to exchange one asset for another, at a
specified date in the future, at a rate of exchange specified up
front. However, there are a number of significant differences.

• Major Features of Futures Contracts
• Organized Exchanges not OTC markets.
• Standardization : Amount of asset, expiry dates,
deliverable grades etc.
• Clearing House: A party to all contracts. Guarantees
performance. Mitigates/Eliminates Credit Risk
• Daily mark-to-market and a system of margins.
• Actual delivery is rare.

Foreign Currency Futures
• Contract specifications are established by the
exchange on which futures are traded.
• Major features that are standardized are:
– Contract size
– Method of stating exchange rates
– Maturity date
– Last trading day
– Collateral and maintenance margins
– Settlement
– Commissions
– Use of a clearinghouse as a counterparty

FUTURES CONTRACTS
• Global Futures Exchanges:
• 1) IMM: International Monetary Market
• 2) LIFFE: London International
Financial Futures Exchange
• 3) CBOT: Chicago Board of Trade
• 4) SIMEX: Singapore International

Monetary Exchange
• 5) DTB: Deutsche Termin Bourse
• 6) HKFE: Hong Kong Futures Exchange

FUTURES CONTRACTS
• B. Forward vs. Futures Contracts

Basic differences:









1) Trading Locations
2) Regulation
3) Frequency of delivery
4) Size of contract
5) Transaction Costs
6) Quotes
7) Margins
8) Credit Risk

Comparison of the Forward & Futures Markets
Contract size
Delivery date
Participants

Forward Markets
Customized

Customized
Banks, brokers,

Standardized
Banks, brokers,

Security

Compensating

Small security

Clearing

Handled by

MNCs. Public
speculation not
encouraged.

MNCs. Qualified
public speculation
encouraged.

deposit
bank balances or
credit lines needed.
operation
individual banks
& brokers.
clearinghouse.
Daily settlements
to market prices.

deposit required.

Handled by
exchange

Futures Markets
Standardized

Comparison of the Forward & Futures Markets
Marketplace

Forward Markets
Worldwide
telephone
network

Futures Markets
Central exchange

floor with worldwide
communications.

Regulation

Self-regulating

Commodity

Liquidation

Mostly settled by

Mostly settled by

Transaction

Bank’s bid/ask

Negotiated

Futures Trading
Commission,
National Futures
Association.
actual delivery.
Costs

offset.

spread.

brokerage fees.

FUTURES CONTRACTS
• Advantages of Futures: • Disadvantages of
Futures:
• 1) Easy liquidation
• 2) Well- organized and
stable market.
• 3) No credit risk

• 1) Limited to a few
currencies
• 2) Limited dates of
delivery
• 3) Rigid contract sizes

FUTURES CONTRACTS ON IMM
• Available Futures Currencies/Contract Size:








1)
2)
3)
4)
5)
6)
7)

British pound / 62,500
Canadian dollar /100,000
Euro / 125,000
Swiss franc / 125,000
Japanese yen / 12.5 million
Mexican peso / 500,000
Australian dollar / 100,000

Exchange traded currency futures were launched in India on
August 29, 2008. As of now only USD-INR contracts have
been permitted with contract size of USD 1000 with monthly
maturities upto twelve months. The contracts will be cash
settled in INR. Contracts will expire on the last working day
of the month. Quotations will be given in rupee terms.
Unlike OTC forwards, no underlying exposure is required to
trade in USD-INR futures. Individuals can also trade for
purely speculative purposes.
Margins will be calculated using a VAR framework.
Contracts have started trading on NSE. Eventually, they will
also be traded on MCX and BSE. Contracts between INR and
other currencies will be introduced later based on perception
of market interest.

FUTURES CONTRACTS
• Transaction costs:
• Commission payment to a floor trader;
Brokerage, Bid-Offer Spreads

• Leverage is high
• Initial margin required is relatively low
(less than 2% of contract value).

FUTURES CONTRACTS:
SAFEGUARDS
• Maximum price movements
• 1) Contracts set to a daily price limit
restricting maximum daily price
movements.
• 2) If limit is reached, a margin call may
be necessary to maintain a minimum
margin.

System of Margins
• Initial margin : When position is opened
• Variation Margin: Settlement of daily gains and losses
• Maintenance Margin : Minimum balance in margin account.
Balance falls below this, margin call issued. If not met, position
liquidated.
• Regulators specify minimum margins between clearing
members and clearinghouse. Margins at other levels
negotiated
• Margins can be deposited in cash or specified securities such
as T-bills. Interest on securities continues to accrue to owner.
Margin is a performance bond.
• Levels of margins may be changed if volatility increases.

System of Margins
• With clearing house guarantee, buyer-seller need not worry
about each other’s creditworthiness.
• Standardized contracts with margin system increase
liquidity.

Protects clearing house; enhances financial integrity
of the exchange. Credit risk issues almost eliminated

CLEARING
HOUSE

CLEARING
MEMBER A

CLEARING
MEMBER B
NON-CLEARING
MEMBER

CUSTOMER

NON-CLEARING
MEMBER
CUSTOMER
CUSTOMER

CUSTOMER

TYPES OF ORDERS IN FUTURES MARKETS
Market Orders : Execute at best available price
Limit Orders: Sell above or buy below stated limits
Market If Touched or MIT Orders: Become market orders
if price touches a trigger
Stop-Loss Orders : Sell if price falls below a limit; buy if it rises
above a limit. Used to limit losses on existing positions
Stop Limit Orders : Stop loss plus limit
Time of Day Orders, Day Orders, Good Till Canceled(GTC)
Orders
Participants : Brokers, Floor Traders, Dual Traders, Futures
Commission Merchants. Hedgers and speculators
both participate.

Currency Futures Contract Specifications
Exchange: IMM at Chicago Mercantile Exchange(CME)
Size:
"Tick":
(Per Contract)

British Pound
£625000
$ 0002 per £
($12.50)

Japan Yen
¥12,500,000
$0.000001 per ¥
($12.50)

Expiry Months: January, March, April, June, July, September,
October, December, & Spot Month (Both GBP and JPY)
Limit: NO LIMIT FOR THE FIRST 15 MINUTES OF TRADING.
A schedule of expanding price limits will be in effect when the 15minute period is ended. (Both GBP and JPY)
“Tick” : Minimum size of price movement.

PRICE QUOTES OCTOBER 1, 2009
JAPANESE YEN (CME)
USD PER 100 JPY
Contract

Open

High

Low

Settle

Chg

Dec 09 1.1153 1.1189

1.1095 1.1146 -.0016

Mar 10 1.1140 1.1194

1.1109

1.1153 -.0017

Jun 10 1.1120 1.1185

1.1120

1.1167

SOURCE : WALL STREET JOURNAL

-.0018

Op Int

117663
107
9

OCTOBER 1, 2009
BRITISH POUND (CME)
Contract

Dec 09

Open

High

1.6005 1.6024

Mar 10 1.5992

1.6009

Low

Settle

Chg

Op Int

1.5920

1.5946 -.0056

102389

1.5923

1.5945 -.0056

97

SOURCE : WALL STREET JOURNAL

OCTOBER 1, 2009
SWISS FRANC (CME)
Contract Open
Dec 09 0.9658

High

Low

0.9678 0.9571

Settle

Chg

0.9608 -.0052

SOURCE : WALL STREET JOURNAL

OP INT
45156

USD/INR CONTRACT TRADED ON MCX-SX
OCTOBER 1, 2009 QUOTES
CONTRACT

OPEN

HIGH

LOW

CLOSE

OP.INT

NOTIONAL
VALUE

OCT 09

47.90

47.99

47.78

47.86

300000

522288.06

NOV 09

48.03

48.10

47.89

47.96

95700

139438.45

DEC 09

48.11

48.18

47.99

48.05

4800

1482.95

JAN 10

48.19

48.19

48.10

48.10

2000

15.01

CONTRACT SIZE : USD 1000 TICK SIZE : Rs.0.25
NOTIONAL VALUE: VALUE OF CONTRACTS TRADED RS.LAKH
EXPIRY DATE: 2 BUSINESS DAYS BEFORE THE LAST WORKING DAY
OF THE CONTRACT MONTH
Source: BUSINESS STANDARD

MCX-SX USD/INR FUTURES, November 25, 2008
The MCX-SX INR December futures opened stronger and made a high of
49.96 on the back of overnight strength seen in US markets coupled with
strong Asian markets in the morning. US rescue package of around $306
billion to Citigroup saw support being provided to stock markets.
One-month offshore Non-Deliverable Forward contracts were quoting at
50.62/77, weaker than the onshore spot rate, indicating the outlook for the
currency continues to be bearish in the near term.
MCX-SX INR December futures towards the end of the session closed
towards 50.33. Supports are at 50 followed by 49.7, while the resistances
are seen around 50.60 followed by 50.95 levels.
MCX-SX INR January futures closed towards 50.52 and registered a
volume of 13.02cr and the open interest increased by 52.03% from the
previous session.

Mumbai, Dec 2 The December futures contract today ended higher at 50.43 on the
currency derivatives segment of the MCX Stock Exchange (MCX-SX).
The December contract resumed lower due to sharp losses seen in Asian stock
markets. Looses in the market would see more outflows of funds, which would
continue to pressure rupee in the near term.
RBI intervention was seen around 50.50 to arrest the rupee fall. But the inflows into
the system are very less compared to outflows by the FIIs. Foreign fund outflows
have been a key factor for the rupee's decline this year, which is 22 per cent down.
One-month offshore Non-Deliverable Forward contracts were quoting at 51.35/50,
weaker than the onshore spot rate, indicating a bearish outlook for the currency.
Supports for December contract are at 50.15 followed by 4990, while the resistance
are seen around 50.95 followed by 5120 levels and January futures closed towards
50.65 and registered a volume of 96.385 crore
Spot rupee closed stronger during the session. Supports hold between 49.55/65
followed by crucial support at 49.10, Resistance are around 50.90 followed by 5130
levels
The MCX-SX active December contract registered volume increase of around 21.16
per cent over the previous session.

FUTURES PRICES, SPOT PRICES AND
EXPECTED SPOT PRICES
• Basis = (Spot Price – Futures Price)
• Normal Backwardation : Hedgers net short.
Speculators must be net long; they would do so if they
expect futures price to rise.
Futures price rises as maturity approaches.
• Contango : Hedgers net long. Speculators net short.
Futures price expected to fall as maturity approaches
• Net Hedging Hypothesis
• Risk Aversion and behaviour of futures prices
•Futures Price = Expected Spot Price ?

Backwardation

Contango

EXPECTED SPOT PRICE

FUTURES
PRICE

FUTURES PRICE

Expiry

Time

Expiry

Time

FUTURES PRICES AND FORWARD
PRICES
• DETERMINISTIC INTEREST RATES:
FUTURES PRICES EQUAL FORWARD PRICES
• STOCHASTIC INTEREST RATES : FUTURES
PRICES DIFFER FROM SPOT PRICES DUE TO
DAILY GAINS AND LOSSES
• SPOT PRICE AND INTEREST RATE
POSITIVELY CORRELATED : FUTURS PRICE
EXCEEDS FORWARD PRICE
• NEGATIVE CORRELATION: FUTURES PRICE
LESS THAN FORWARD PRICE

FUTURES PRICE AND SPOT PRICE
CASH-AND -CARRY ARBITRAGE
• Spot Price of a dollar : Rs.44.00
• 3-month Futures Price : 45.75
• Rupee interest rate : 6% p.a.
• Dollar interest rate : 4% p.a.
• Borrow rupees, buy dollars and deposit, sell futures.
• 3 months later, deliver, get rupees, repay loan.

Suppose contract size is $50000.
Must deposit $(50000)/(1.01) = $49504.95
Must borrow Rs.(49504.95)(44.0) = Rs.2178217.82
Must repay (2178217.82)(1.015) = 2210891.09
On expiry, liquidate deposit, deliver on futures collect
Rs.2275000. Net profit: 64108.91
Futures Price “too high” : Buy asset in spot market, store,
pay storage cost, sell futures, deliver at expiry.
Futures Price too low (e.g.44.60)
Reverse cash-and- carry arbitrage. Borrow dollars, convert
to rupees and deposit, buy futures. Take delivery at expiry
and repay dollar loan. Nothing but Covered Interest
Arbitrage

Arbitrage and Theoretical Futures Price
Let C denote the present value of carrying costs, St the spot
price, r the interest rate, and FUt,T the futures price for delivery
at T, Then theoretical futures price is given by
FUt,T = (St + C)[1 + r(T-t)]
Actual futures price higher : cash-and-carry arbitrage
Actual futures price lower: reverse cash-and-carry arbitrage
For currency futures, futures prices are almost identical to
forward prices.
A similar relation will hold between FUt,T1 and Fut,T2, T2>T1>t

In practice futures price does not exactly equal
theoretical futures price. Reasons:
1 Transaction costs – bid-offer spreads, brokerage
2 In some cases, restrictions on short sales (Does not
apply to currency futures)
3 Non-constant interest rates
4 Mark-to-market gains/losses.
5 “Convenience yield” (Commodity futures)
A band of variation around theoretical price.

Hedging with Currency Futures
A corporation has an asset e.g. a receivable in a currency A.
•To hedge it should take a futures position such that futures
generate a positive cash flow whenever the asset declines in
value.
•The firm is long in the underlying asset, it should go short in
futures i.e. it should sell futures contracts on A against its home
currency.
•When the firm is short in the undelying asset – a payable in
currency A – it should go long in futures.
Cash Position: Receive A; Futures Position: Deliver A
Cash Position: Deliver A; Futures Position: Receive A
If no futures between A and HC, use futures between A and a
currency closely correlated with HC.

Futures Hedge : An Example
January 30. A UK firm has $250000 payable due on August 1.
£/$ spot:1.7550.
GBP Futures: September: 1.7125 December: 1.6875
Decides to hedge with September futures. GBP value of USD
payable at futures price:
(250000/1.7125) = £145985.40.
Each GBP futures contract is for £62500.
Sells (145985.40/62500) = 2.3357 rounded off to 2 contracts.
Could be rounded off to 3 contracts.

On July 30 the rates are:
July 30: £/$ spot: 1.6850 September futures: 1.6750
Firm buys USD spot. It has to pay
GBP(250000/1.6850) = £148367.95
Compared to the GBP value of payable at the spot rate at start
this represents a loss of GBP 5917.81 .
Buys 2 September futures contracts at $1.6750 to close out the
futures position.
Gain on futures : $(1.7125-1.6750)(2)(62500) = £4687.50.
Not a perfect hedge. Basis narrowed.

Futures Hedge : Example (contd)
• Choice of contract underlying was obvious.
• Firm chose a contract expiring immediately after the payable
was to be settled. Is this necessarily the right choice?
• The number of contracts chosen was such that value of
futures position equaled the value of cash market exposure,
aside from the unavoidable discrepancy due to standard size of
futures contracts. Is this the optimal choice?
Futures hedge involves three considerations: Underlying,
expiry date of the contract, number of contracts. The latter
two problems do not arise with forwards. Why?

Three Decisions
(1) Which contract should be used i.e. the choice of
"underlying".
Home currency A; exposure in B; futures on B against A
available – Direct hedge.
Home currency A; exposure in C; no futures on C against
A. B and C are highly correlated; use futures on B – Cross
Hedge
(2) Choice of expiry date : In February A UK firm books a USD
payable maturing on June 3. To hedge, must sell GBP futures
(Buy USD futures). Which month? June or later?
(3) How many contracts? Choice of “hedge ratio”.

Choice of expiry date: As expiry date approaches, basis narrows.
On expiry date futures price equals spot price. This is known as
“Convergence”.
Does convergence help you or hurt you?
If convergence helps, choose near contract
If convergence hurts, choose far contract.
However, liquidity less in far contracts; bid-offer spreads are
higher; basis volatility more.
Thumb rule followed by practitioners: Choose expiry date
immediately after underlying exposure is to be settled.

Choice of Expiry Date
Basis at the start
Positive
Negative
Nature of hedge
Long
Short

F
A

A
F

Long Hedge: You must take delivery of underlying in your
futures position. You have bought futures contracts.
Short Hedge : You must make delivery of underlying in your
futures position. You have sold futures.
F: Convergence favours you. A: Convergence against you.
Positive Basis: Spot price > Futures Price

Choosing the Number of Contracts
• A Swiss firm has a USD payable of $500,000, maturing November
15.
• It decides to sell December contracts priced at $0.74/CHF.
• At this price, the CHF equivalent of $500,000 is CHF 675675.68.
• Since one CHF contract is for CHF 125,000, it should sell :
(675675.68/125000) = 5.4054 rounded off to 5 or 6 contracts.
Sounds logical but is it necessarily correct?
What is the objective of hedging?
• To minimize the variance of the hedged position?
Define the "Hedge Ratio"(HR) as : VF/VH
= (Value of futures position/Value of cash position)

Direct Hedge with a Timing Mismatch
Choosing Hedge Ratio
• A Swiss firm on February 28 has a USD 500,000 payable to be
settled on July 1.
• Cash market position short USD. Must buy USD futures or
short CHF futures.
• It chooses to hedge by selling September CHF contracts. This
contract matures on September 18.
• The spot rate is USD/CHF 1.3335 or CHF/USD 0.7499
• September futures price is USD/CHF 1.4518 or CHF/USD
0.6888
• Each CHF contract is for CHF 125000.
• Determine the number of contracts it should short.
.

Choosing Hedge Ratio ….
VC : The value of the cash market position measured in the
foreign currency.
St : The spot rate at the start stated as units of home
currency(HC) per unit of foreign currency(FC).
T1 : The date when the cash position has to be settled.
T2 : The date when the futures contract expires, T2 > T1
VF : The value of the futures position measured in US dollars.
Ft,T2 : The price at time t of the futures contract maturing at T2
stated as units of HC per unit of FC.
In the example HC: CHF
FC: USD
Vc = $500000

St = 1.3335 T1: July 1

Choosing Hedge Ratio….
F~ T1,T2 : The price of the same contract at time T1 (a random
variable)
S~ T1 : The spot rate at time T1 when the hedge is lifted.
Stated as units of HC per unit of FC. (Random variable)
The value of the hedged cash flow at time T1 is given by
V˜H,T1 = - VCS˜T1 + VF (Ft,T2 – F~ T1,T2)
The variance of V˜H,T1 is
(VC)2  2(S˜T1) + (VF)2  2(F˜T1T2) – 2VCVF COV(S˜T1 F~ T1,T2)
Let H = VF/VC be the hedge ratio

Then
(VC)2  2(S˜T1) + (VF)2  2(F˜T1T2) – 2VCVF COV(S˜T1 F~ T1,T2)
= (VC)2 [ 2(S˜T1) + H2  2(F˜T1T2) – 2H COV(S˜T1 F~ T1,T2)]
To minimize this w.r.t. H
2 H  2(F˜T1T2) – 2 COV(S˜T1 F~ T1,T2) = 0
This leads to
H = VF/VC = COV(S~T1, F~T1T2) / VAR(F~T1T2)
We need forward-looking estimates of these parameters.
Using past data estimate a regression equation:
S~T1 =  +  F~T1T2 + u
The estimate of  can be used as hedge ratio. But this would be
a historical estimate.

• Let us apply this result to the Swiss firm's case.

• Assume that we have somehow obtained estimates of the
covariance of S˜T1 and F˜T1,T2 and the variance of F˜T1,T2.
• Their ratio is 0.90.
• Then the USD value of the futures position must be
(500,0000.90) = USD 450,000.
• At the futures price of $0.6888/CHF this translates into
CHF 653310.10.
• With each contract being CHF 125,000 this is equivalent
to 5.23 contracts rounded off to 5 or 6 contracts.

The interest parity relation tells us that
[1 + rB(T-t)]
Ft,T2(A/B) = St(A/B) ----------------- = k St(A/B)
[1 + rA(T-t)]

where

[1 + rB(T-t)]
k = ----------------[1 + rA(T-t)]

If the factor k remains constant, then
(FT1,T2-Ft,T2) = k(ST1 - St)
and a hedge ratio VF/VC = 1/k =  would give a perfect hedge.
But k does not remain constant. Optimal hedge ratio keeps changing

• Dynamic hedging: As interest rates and spot rate
keep changing, recalculate the optimal hedge ratio
and rebalance the hedge by selling more futures or
buying futures. How frequently?
• Transaction costs must be considered. Any gain
from frequent rebalancing must be weighed against
increased transaction costs.
• Large position, long duration of hedge, more
frequent rebalancing warranted.
• Standard-size problem cannot be circumvented.

SPECULATION WITH CURRENCY FUTURES
• Open Position Trading
In April Spot EUR/USD: 1.5750
June Futures : 1.5925
September Futures: 1.6225
You do not think EUR will rise. It will fall.
You do not think EUR will rise so much.
How to profit from this view? Sell September.

SPECULATION WITH CURRENCY
FUTURES
On September 10 the rates are :
Spot EUR/USD: 1.5940 September futures: 1.5950
Close out by buying a September contract.
Profit USD(1.6225-1.5950) per EUR on 125000 EUR
= USD 3437.50 minus brokerage etc.
First view was wrong; EUR did appreciate but not as
much as implied by futures price.

SPREAD TRADING
• Intercommodity Spread
In April : Spot EUR/USD : 1.5500 GBP/USD: 1.9000
September Futures: EUR: 1.5800 GBP: 1.8580
Your view: GBP is going to rise against EUR.
What should you do?
• Intracommodity Spread:
June EUR: 1.5800 September EUR : 1.7500
Your view: Between June and September EUR will not
rise so much. What should you do?

INTEREST RATE FUTURES
Treasury Bill Futures
A futures contract on US treasury bills is traded on
the CME. Its specifications are as follows:
Product and Trading unit: 13 WEEK TREASURY
BILL FUTURES
3-month (13-week) U.S. Treasury Bills having a face
value at maturity of $1,000,000
Point Description: ½ point = .005 = $12.50. A point
here is one basis point or (1/100)th of 1 percent.

Trade Unit

3-month (13-week) U.S. Treasury Bills having a face
value at maturity of $1,000,000

Settle Method

Cash Settled

Point
Descriptions

? point = .005 = $12.50

Contract
Listing

Mar, Jun, Sep, Dec, Four months in March quarterly
cycle plus 2 months not in the March cycle (serial
months).
Current Listings

Strike Price
Interval

N/A

Product
Code

Clearing=T1
Ticker=TB
GLOBEX=GTB

T-Bill Futures Contract on CME….
• The dollar value of a point represents interest at 0.01%
p.a. on $1 million for a period of 3 months, which works
out to $25.
• Contract Listings: Mar, Jun, Sep, Dec,
Four months in March quarterly cycle plus 2 two months
not in the March cycle (serial months).
• The short must deliver a US T-bill with face value USD 1
mio, with 90, 91 or 92 days to maturity.
• Futures price stated as: 100.000-Discount yield
• Rates rise, price falls; rates fall, price rises.

Three Month Euro (EURIBOR) Interest Rate Futures
Contract (LIFFE)
Unit of trading: €1,000,000
Delivery months: March, June, September, December, and
four serial months, such that 25 delivery months are available
for trading, with the nearest six delivery months being
consecutive calendar months
Quotation: 100.00 minus rate of interest
Minimum price movement (tick size and value): 0.005 (€12.50)
Last trading day: Two business days prior to the third
Wednesday of the delivery month
Delivery day: First business day after the Last Trading Day
Trading hours: 07:00 – 21:00

THE EURODOLLAR DEPOSIT CONTRACT
• The underlying asset is a 3-month Eurodollar deposit
of USD 1 million beginning on expiry date of futures.
• Contract price is stated as (100-Implied Interest Rate)
• May be cash settled only or both cash settled and
physical delivery. If latter, long is actually assigned a
deposit at a eurobank.
• As interest rate rises, contract price falls. As rates fall,
contract price rises.
• To hedge against falling rates, buy futures; to hedge
against rising rates sell futures

CME Eurodollar Futures
Trade Unit : Eurodollar Time Deposit having a principal
value of $1,000,000 with a three-month maturity.
Settle Method : Cash Settled
Point Size :1 point = 0.01 = $25.00
Tick Size (Min Fluctuations)
SGX : Half Tick 0.005=$12.50 Quarter 0.0025=$6.25 for
nearest expiring month.
FLOOR : Half Tick 0.005=$12.50 Quarter 0.0025=$6.25 for
nearest expiring month.
GLOBEX : Half Tick 0.005=$12.50 Quarter 0.0025=$6.25 for
nearest expiring month.

DECEMBER 3, 2008

INTEREST RATE FUTURES DECEMBER 3, 2008

LONG TERM INTEREST RATE FUTURES
• The CBT contract on US T-bonds and T-notes;
LIFFE contract on UK guilts. DTB contract on
German Bunds etc.
• The short must deliver a long term bond from
among a set of eligible bonds -”Basket Delivery”
• The CBT contract on US T-bonds: Underlying is a
notional T-bond with 15 years to maturity and 8%
YTM.
•Exchange calculates a conversion factor for all
eligible bonds.

LONG TERM INTEREST RATE FUTURES
For US T-bond futures, price stated as % of face value with
minimum 1/32% e.g.
Price : 103-18 means 103 and (18/32) percent of $100000
Long pays: Settlement Price × Conversion factor
+ Accrued Interest
Conversion Factor necessary because different bonds have
different coupons and maturities.
An eligible bond has CF of 1.5 - Each of these bonds equals 1.5
of notional bonds.

30 Year U.S. Treasury Bonds Futures
Contract Size
One U.S. Treasury bond having a face value at maturity of $100,000 or multiple thereof.
Deliverable Grades
U.S. Treasury bonds that, if callable, are not callable for at least 15 years from the first day of the delivery month or, if not callable,
have a maturity of at least 15 years from the first day of the delivery month. The invoice price equals the futures settlement price
times a conversion factor plus accrued interest. The conversion factor is the price of the delivered bond ($1 par value) to yield 6
percent.
Tick Size
Minimum price fluctuations shall be in multiples of one-half of one thirty second point per 100 points ($15.625 per contract) except
for intermonth spreads, for which minimum price fluctuations shall be in multiples of one-fourth of one thirty-second point per 100
points ($7.8125 per contract). Par shall be on the basis of 100 points. Contracts shall not be made on any other price basis.
Price Quote
Points ($1,000) and one-half of 1/32 of a point; i.e., 80-16 equals 80-16/32, 80-165 equals 80-16.5/32.
Contract Months
Mar, Jun, Sep, Dec
Last Trading Day
Seventh business day preceding the last business day of the delivery month. Trading in expiring contracts closes at noon, Chicago
time, on the last trading day.
Last Delivery Day
Last business day of the delivery month.
Trading Hours
Open Auction: 7:20 am - 2:00 pm, Chicago time, Monday - Friday
Electronic: 5:30 pm - 4:00 pm, Chicago time, Sunday - Friday
Trading in expiring contracts closes at noon, Chicago time, on the last trading day

30-YEAR T-BOND FUTURES QUOTES
Thursday, 4 December

Contract

Last

Change

Open

High

Low

Prev.
Stl.

Dec '08

132-310

+0-245 132-090 132-310 132-010 132-065

Mar '09

131-305

+0-230 130-315 131-315 130-150 131-075

Jun '09)

130-250

+0-230

0-000 130-250 130-020 130-020

Sep '09

129-135

+0-230

0-000 129-135 128-225 128-225

Dec '09

128-015

+0-230

0-000 128-015 127-105 127-105

Hedging a Commercial Paper Issue.
•In January a corporation finalises its plans to make an issue
of $50 million 90-day commercial paper around mid May.
•Paper of comparable quality is now yielding 12.05%.
•At this yield the company hopes to realise $48,493,750.
•To protect itself against the possibility that rates may rise
before its issue hits the market decides to hedge using
EURO$ futures.
• June futures currently quoted at 88.75
• What should it do?

SPECULATION WITH INTEREST RATE
FUTURES
Open Position Trading
On September 1, December eurodollar futures on the IMM is
trading at 89.25. A trader believes that short term interest rates
are going to fall very soon. He buys a December contract at
89.25. On subsequent days, the prices and consequent
losses/gains are :
Day 1: 89.35 (+$250) Day 2: 89.32 (-$75)
Day 3: 89.45 (+$325) Day 4: 89.47 (+$50)
Day 5: 89.45 (-$50) Day 6: 89.50 (+$125) Liquidates position.
Total gain: $625 minus brokerage commissions.

An Intra-Contract Spread Trade
On February 25 the following prices are quoted for T-bill
futures on the IMM :
March : 96.02
June : 95.25
September : 94.50
December : 93.00
A trader feels that the yield curve is going to become
flatter. He has no particular ideas about how interest
rates as a whole are going to change but he is confident
that long term rates will be lower relative to short-term
rates than they are now.

Intra-Contract Spread Trade…..
If his prediction comes true the spread between near
and far contracts will narrow. To profit from this he
must sell a near contract and buy a far contract. (”sell
a spread"). He sells a September contract at 94.50 and
buys a December contract at 93.00.
By August 10, rates have fallen, yield curve is flatter:
September: 95.50 December: 94.75
Close out. Buy September sell December. Net gain 75 ticks or
USD 1875 minus brokerage.
Better strategy: Sell T-bill futures buy T-bond futures.

Sponsor Documents

Or use your account on DocShare.tips

Hide

Forgot your password?

Or register your new account on DocShare.tips

Hide

Lost your password? Please enter your email address. You will receive a link to create a new password.

Back to log-in

Close