Chapter 9

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

IMM: International Monetary Market

LIFFE: London International Financial Futures
Exchange
CBOT: Chicago Board of Trade
SIMEX: Singapore International Monetary Exchange
DTB: Deutsche Termin Bourse
HKFE: Hong Kong Futures Exchange
 FUTURES CONTRACTS

Forward Vs. Futures Contracts

Basic differences:
Trading Locations
Regulation
Frequency of delivery
Size of contract
Transaction Costs
Quotes
Margins
Credit Risk
 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 Compensating 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.
 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.
Transaction Banks bid/ask Negotiated
Costs spread. brokerage fees.
 FUTURES CONTRACTS

Advantages of Disadvantages of
Futures: Futures:

Easy liquidation Limited to a few

Well- organized and currencies
stable market. Limited dates of
No credit risk delivery
Rigid contract sizes
 FUTURES CONTRACTS ON IMM

Available Futures Currencies/Contract Size:

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
 CURRENCY FUTURES IN INDIA
Currency futures markets were launched in India in August 2008.
The regulatory authorities viz. RBI and SEBI issued guidelines for
exchange traded currency futures in August 2008 and permitted
the three major stock exchanges viz. NSE, BSE and MCX to launch
the US dollar- Indian rupee contract.

Subsequently, in January 2010 futures contracts between Rupee

and Euro, Rupee and Pound Sterling and Rupee and Yen were
introduced on these exchanges.

Only Indian residents are allowed to trade in these contracts.

Also, there is no requirement of underlying currency exposure so
that individuals and companies can use them for currency
speculation.
 Contracts with monthly maturities out to twelve months are
available. The contracts are cash settled in INR. Contracts expire
on the last working day of the month. Quotations are given in
rupee terms.

While contracts out to twelve calendar months are available,

only in the case of USD-INR there is some trading volume out to
about six months but in other currencies there is virtually no
trading beyond 2-3 months.

Contracts are traded on MCX-SX and NSE. Recently, the trading

volume on MCX-SX has been larger than NSE. USE, a new
exchange launched by BSE in partnership with MMTC, ICICI
Bank and State Bank of India has also started trading the four
currency futures contracts.

Margins are calculated using a VAR framework.

 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

Contracts set to a daily price limit restricting

maximum daily price movements.

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 others 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 CLEARING
MEMBER A MEMBER B

NON-CLEARING
MEMBER CUSTOMER
CUSTOMER NON-CLEARING
MEMBER
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)

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.
 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

 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

 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

 USD/INR FUTURES CONTRACT SPECIFICATIONS
Underlying The exchange rate in Indian Rupees for a US
Dollar

Unit of trading 1 (1 unit denotes 1000 USD)

Trading Hours 9.00 a.m. to 05.00 p.m. (Mon to Fri)

Contract trading cycle 12 month trading cycle.

Contract Expiration Date Last business day of the month

Tick Size 0.25 paise or INR 0.0025

Last Trading Day Two working days prior to the last business day
of the expiry month at 12 noon

Final settlement day Last working day (excluding Saturdays) of the

expiry month. The last working day will be the
same as that for interbank settlements in
Mumbai.
USD/INR FUTURES CONTRACT
SPECIFICATIONS
Mode of settlement : Cash settled in Indian
Rupees

Daily settlement price (DSP) : Calculated on the basis of

the last half an hour weighted average price.

Final settlement price (FSP) : RBI reference rate

 RUPE-DOLLAR FUTURES CONTRACT ON DGCX
Symbol DINR
Contract Size INR 2,000,000
Delivery Months Monthly contracts for twelve months forward
Last Trading Day Two Business Days prior to the last working day of the contract month
The Business Day immediately following the last day of expiring
Settlement Day
contract
New Contract Listing Business day immediately following the last trading day
US$ quoted in Cents per 100 Indian Rupees ( e.g. 209.56 /209.62 US
Price Quote
Cents per 100 Indian Rupees)
Tick Size US$ 0.000001 per INR or $ 2 per tick
Trading Days Monday through to Friday
Trading Hours 08:30 - 23:30 Hours Dubai time (GMT+4)
500 lots for Banks and institutions promoted by Banks. All other entities
Maximum Order Size
200 Lots
Price Limit No Price Limits - Note 1*
Wholesale Trades EFS, EFP, Block trade facilities available
Open Positions at expiry of contract shall be settled in US Dollars as per
the Dialy Settlement Price (DSP) declared by the Exchange.
Cash Settlement Price Basis The DSP would be based on the official US Dollar reference rate issued
by the Reserve Bank of India, based on bank rates in Mumbai at 12
noon on the day of trading or earliest available date
 CONTRACT SPECIFICATIONS FOR
EURO-INR

Symbol : EURINR
Unit of trading : 1 (1 unit denotes 1000 EURO)
Underlying : EURO
Quotation/Price Quote : Rs. per EUR
Tick size : 0.25 paise or INR 0.0025
Trading hours : Monday to Friday 9:00 a.m. to 5:00 p.m.
Contract trading cycle : 12 month trading cycle.
Settlement price : RBI Reference Rate on the date of expiry
 Last trading day : Two working days prior to the last
business day of the expiry month at 12 noon.
Final settlement day : Last working day (excluding
Saturdays) of the expiry month. The last working day will
be the same as that for Inter-bank Settlements in Mumbai.
Mode of settlement : Cash settled in Indian Rupees
Daily settlement price (DSP) : DSP shall be calculated on
the basis of the last half an hour weighted average price of
such contract or such other price as may be decided by
the relevant authority from time to time.
Final Settlement Price : RBI reference rate
Commercial banks have to obtain RBIs approval
to trade in currency futures.

RBI has set the eligibility criteria for the banks as

follows :
The qualified banks must be authorized by RBI

Must have minimum net worth of Rs.500-crores

Minimum CRAR of 10 per cent

Net NPA should not exceed 3 per cent

Must have earned net profit for last 3 years

 MCX-SX* CURRENCY FUTURES
AS ON : JUNE 14, 2012

CONTRACT OPEN HIGH LOW CLOSE VOLUME OI

USDINR
Jun-2012 55.73 55.94 55.6575 55.8475 1472414 858651
Jul-2012 56.0575 56.23 55.94 56.1225 41785 228552
Aug-2012 56.1775 56.455 56.1775 56.3525 6612 117363
Sep-2012 56.5 56.63 56.42 56.57 681 52379
Oct-2012 56.705 56.85 56.62 56.77 246 27405
Nov-2012 56.8225 57 56.8225 57 32 9315
Dec-2012 56.95 56.95 56.95 56.95 6 5165
Jan-2013 57.24 57.24 57.24 57.24 3 2275
Feb-2013 57.825 57.825 57.825 57.825 2 5883
Mar-2013 58.1 58.1 57.87 57.87 1202 12302
Apr-2013 58 58.1725 58 58.17 102 31321
 MCX-SX* CURRENCY FUTURES
AS ON : JUNE 14, 2012

Contract Open High Low Close Qty

Vol OI
EURINR
Jun-2012 70.02 70.2 69.945 70.1475 22885 26303
Jul-2012 70.38 70.47 70.25 70.4325 376 3080
Dec-2012 70 70 70 70 60 1100
GBPINR
Jun-2012 86.6 86.73 86.2625 86.6825 10246 16712
Jul-2012 86.96 87.0225 86.59 86.9725 296 3318
Aug-2012 87.2 87.2 87.2 87.2 50 349
JPYINR
Jun-2012 70.195 70.46 70.0325 70.3975 12688 12550
Jul-2012 70.4525 70.7575 70.35 70.715 181 2448
 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 FUTURES PRICE

PRICE

Expiry Expiry
Time 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 : Futures 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.52.00
3-month Futures Price : Rs.53.80
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 the deal size is $50000 i.e. you have sold 50
USD-INR contracts on MCX
Must deposit $(50000)/(1.01) = $49504.95
Must borrow Rs.(49504.95)(52.0) = Rs.2574257.40
Must repay (2574257.40)(1.015) = 2612871.26
On expiry, liquidate deposit, deliver on futures collect
Rs.2690000. Net profit: 77128.74
Futures Price too high : Buy asset in spot market, store, pay
storage cost, sell futures, deliver at expiry.
Futures Price too low (e.g.52.65)
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:
Transaction costs bid-offer spreads, brokerage
In some cases, restrictions on short sales (Does not apply to
currency futures)
Non-constant interest rates
Mark-to-market gains/losses.
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.
 HEDGING WITH
CURRENCY FUTURES

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
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
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?
How many contracts? Choice of hedge ratio.
Value of futures position = Value of underlying exposure?
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 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 > 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.
 CHOOSING THE NUMBER OF
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?
 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.
T2: September 18 Ft,T2 = 1.4518
 CHOOSING HEDGE RATIO .
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
 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)
 CHOOSING HEDGE RATIO.
Let H = VF/VC be the hedge ratio
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(S~T1, F~T1T2) / VAR(F~T1T2)
 CHOOSING HEDGE RATIO.
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 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
(500,0000.90) = 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)]

[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
 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: 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 ? point = .005 = $12.50

Descriptions

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

Strike Price N/A

Interval

Product Clearing=T1
Code 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.
INTEREST RATE FUTURES QUOTATIONS 29 JUNE, 2010
____________________________________________
Expiry Open Sett Change High Low Open
Month Interest

Euribor MAR11 98.92 98.94 +0.03 98.96 98.92 503091

Euribor JUN11 98.87 98.88 +0.03 98.90 98.87 353521
Sterling DEC10 99.04 99.04 +0.01 99.07 99.03 363713
Sterling MAR11 98.96 98.97 +0.02 99.01 98.96 326657
Sterling JUN11 98.84 98.84 +0.03 98.88 98.81 302845

Euro$ AUG10 99.370 99.39 -0.005 99.395 99.370 11901

Euro$ NOV10 99.245 99.24 --- 99.245 99.235 545
Euro$ MAR11 99.150 99.16 +0.010 99.165 99.130 823929
Euro$ JUN11 99.050 99.07 +0.020 99.075 99.040 864090

Euro DEC10 99.635 99.645 +0.005 99.645 99.635 222300

Euro MAR11 99.640 99.650 +0.010 99.650 99.635 155336
Euro JUN11 99.640 99.650 +0.010 99.655 99.635 132474
____________________________________________
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.