CURRENCY AND INTEREST RATE FUTURES

1
CURRENCY AND INTEREST RATE FUTURES
2
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.

3
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

4
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

5
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

6
Comparison of the Forward Futures Markets
Forward Markets Futures Markets Contract
size Customized Standardized
Delivery date Customized Standardized Participants
Banks, brokers, Banks, brokers, MNCs.
Public MNCs. Qualified speculation not public
speculation encouraged. encouraged. Security Comp
ensating Small security deposit bank balances
or deposit required. credit lines
needed. Clearing Handled by Handled
by operation individual banks exchange
brokers. clearinghouse. Daily settlements to
market prices.
7
Comparison of the Forward Futures Markets
Forward Markets Futures Markets
Marketplace Worldwide Central exchange telephone
floor with worldwide network communications.
Regulation Self-regulating Commodity Futures
Trading Commission, National
Futures Association. Liquidation Mostly settled
by Mostly settled by actual delivery. offset. Tra
nsaction Banks bid/ask Negotiated Costs spread. b
rokerage fees.
8
FUTURES CONTRACTS

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

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

9
FUTURES CONTRACTS ON IMM

• Available Futures Currencies/Contract Size
• 1) British pound / 62,500
• 2) Canadian dollar /100,000
• 3) Euro / 125,000
• 4) Swiss franc / 125,000
• 5) Japanese yen / 12.5 million
• 6) Mexican peso / 500,000
• 7) Australian dollar / 100,000

10
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.
11
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).

12
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.

13

• 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.

14

• System of Margins
• With clearing house guarantee, buyer-seller need
  not worry about each others creditworthiness.
• Standardized contracts with margin system
  increase liquidity.
• Protects clearing house enhances financial
  integrity of the exchange. Credit risk issues
  almost eliminated

15
CLEARING HOUSE
CLEARING MEMBER A
CLEARING MEMBER B
NON-CLEARING MEMBER
CUSTOMER
NON-CLEARING MEMBER
CUSTOMER
CUSTOMER
CUSTOMER
16
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.
17
Currency Futures Contract Specifications
Exchange IMM at Chicago Mercantile
Exchange(CME)
British Pound Japan Yen
Size 625000
12,500,000 "Tick"
0002 per
0.000001 per (Per Contract)
(12.50) (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 15-minute
period is ended. (Both GBP and JPY)   Tick
Minimum size of price movement.
18
PRICE QUOTES OCTOBER 1, 2009
JAPANESE YEN (CME)
USD PER 100 JPY
Contract Open High Low Settle
Chg Op Int Dec 09 1.1153
1.1189 1.1095 1.1146 -.0016
117663 Mar 10 1.1140 1.1194 1.1109
1.1153 -.0017 107 Jun 10 1.1120
1.1185 1.1120 1.1167 -.0018
9
SOURCE WALL STREET JOURNAL
19
OCTOBER 1, 2009
BRITISH POUND (CME)
Contract Open High Low Settle
Chg Op Int Dec 09 1.6005
1.6024 1.5920 1.5946 -.0056
102389 Mar 10 1.5992 1.6009 1.5923
1.5945 -.0056 97
SOURCE WALL STREET JOURNAL
20
OCTOBER 1, 2009
SWISS FRANC (CME)
Contract Open High Low Settle
Chg OP INT Dec 09 0.9658
0.9678 0.9571 0.9608 -.0052 45156
SOURCE WALL STREET JOURNAL
21
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
22
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.
23
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.
24

• 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 ?

25
Backwardation
Contango
EXPECTED SPOT PRICE
FUTURES PRICE
FUTURES PRICE
Expiry
Expiry
Time
Time
26

• 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

27

• 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.

28
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
29
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, T2gtT1gtt
30
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.
31

• 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.

32
Futures Hedge An Example January 30. A UK firm
has 250000 payable due on August 1.
/ spot1.7550. 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.
33
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.
34

• 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?

35
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. Value of futures position
Value of underlying exposure?
36
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.
37
Choice of Expiry Date
Basis at the start
Positive Negative
Nature of hedge
Long
F A Short
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 gt Futures Price
38

• 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)
• Should HR 1.0
  always?

39

• 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.
• .

40
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 gt 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
T2 September 18 Ft,T2
1.4518    
41
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
VH,T1 - VCST1 VF (Ft,T2 F T1,T2) The
variance of VH,T1 is (VC)2 ?2(ST1) (VF)2
?2(FT1T2) 2VCVF COV(ST1 F T1,T2) Let H
VF/VC be the hedge ratio
42
Then (VC)2 ?2(ST1) (VF)2 ?2(FT1T2) 2VCVF
COV(ST1 F T1,T2) (VC)2 ?2(ST1) H2
?2(FT1T2) 2H COV(ST1 F T1,T2) To minimize
this w.r.t. H 2 H ?2(FT1T2) 2 COV(ST1 F
T1,T2) 0 This leads to H VF/VC COV(ST1,
FT1T2) / VAR(FT1T2) We need forward-looking
estimates of these parameters. Using past data
estimate a regression equation ST1
? ? FT1T2 u The estimate of ? can be used
as hedge ratio. But this would be a historical
estimate.
43

• Let us apply this result to the Swiss firm's
  case.
• Assume that we have somehow obtained estimates
  of the covariance of ST1 and FT1,T2 and the
  variance of FT1,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.

44
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)     1
rB(T-t) where 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


45

• 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.

46

• 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.

47
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.
48

• 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?

49
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.
50
CME 13 WEEK US T-BILL
 
Trading Venue Floor Trading Venue Floor Trading Venue Floor

Hours 720 a.m.-200 p.m LTD(1200 p.m.)
Listed All listed series
Strike N/A
Limits No Limit
   
MinimumFluctuation Regular 0.00512.50
Trade Unit 3-month (13-week) U.S. Treasury Bills having a face value at maturity of 1,000,000

Settle Method Cash Settled

PointDescriptions ? point .005 12.50

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

Strike PriceInterval N/A

ProductCode ClearingT1TickerTBGLOBEXGTB
MinimumFluctuation Regular 0.00512.50
51

• 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.

52
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 0700 2100
53

• 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

54
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 0.00512.50 Quarter 0.00256.25 for
nearest expiring month. FLOOR Half Tick
0.00512.50 Quarter 0.00256.25 for nearest
expiring month. GLOBEX Half Tick 0.00512.50
Quarter 0.00256.25 for nearest expiring month.
55
DECEMBER 3, 2008
56
INTEREST RATE FUTURES DECEMBER 3, 2008
57

• 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.

58
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.
59
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 720 am - 200 pm, Chicago time, Monday - FridayElectronic 530 pm - 400 pm, Chicago time, Sunday - FridayTrading in expiring contracts closes at noon, Chicago time, on the last trading day
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30-YEAR T-BOND FUTURES QUOTES 30-YEAR T-BOND FUTURES QUOTES 30-YEAR T-BOND FUTURES QUOTES 30-YEAR T-BOND FUTURES QUOTES 30-YEAR T-BOND FUTURES QUOTES 30-YEAR T-BOND FUTURES QUOTES 30-YEAR T-BOND FUTURES QUOTES 30-YEAR T-BOND FUTURES QUOTES 30-YEAR T-BOND FUTURES QUOTES 30-YEAR T-BOND FUTURES QUOTES 30-YEAR T-BOND FUTURES QUOTES 30-YEAR T-BOND FUTURES QUOTES 30-YEAR T-BOND FUTURES QUOTES 30-YEAR T-BOND FUTURES QUOTES 30-YEAR T-BOND FUTURES QUOTES
Thursday, 4 December Thursday, 4 December Thursday, 4 December Thursday, 4 December Thursday, 4 December Thursday, 4 December Thursday, 4 December Thursday, 4 December Thursday, 4 December Thursday, 4 December Thursday, 4 December Thursday, 4 December Thursday, 4 December Thursday, 4 December Thursday, 4 December
Contract Contract Last Last Change Change Open Open High High Low Low Prev.Stl.
Dec '08 132-310 132-310 0-245 0-245 132-090 132-090 132-310 132-310 132-010 132-010 132-065 132-065
Mar '09 131-305 131-305 0-230 0-230 130-315 130-315 131-315 131-315 130-150 130-150 131-075 131-075
Jun '09) 130-250 130-250 0-230 0-230 0-000 0-000 130-250 130-250 130-020 130-020 130-020 130-020
Sep '09 129-135 129-135 0-230 0-230 0-000 0-000 129-135 129-135 128-225 128-225 128-225 128-225
Dec '09 128-015 128-015 0-230 0-230 0-000 0-000 128-015 128-015 127-105 127-105 127-105 127-105
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• 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?

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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.
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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.
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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.