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. Daily cash inflows/outflows. Actual delivery is rare. Most positions squared up before expiry.

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 procedure 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

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) British pound / 62500

2) 3) 4) 5) 6) 7) Canadian dollar /100000 Euro / 125000 Swiss franc / 125000 Japanese yen / 12.5 million Mexican peso / 500000 Australian dollar / 100000

FUTURES CONTRACTS
Following are the transaction costs:
(1) Commission payment to a floor trader (2) Brokerage (3) Bid-Offer Spreads

Leverage is high
Initial margin required is relatively low (less than 2% of contract value). This varies between exchanges.

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. Not all exchanges impose such limits. Some exchanges impose these limits in times of excessive volatility.

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 MEMBER A

CLEARING 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 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 62500 $0.0002 per ($12.50) Japan Yen 12,500,000 $0.000001 per ($12.50)

Size: "Tick": (Per Contract)

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.

CME - GBP FUTURES QUOTES 15 JUNE 2012

Current Session
Click for Chart

Prior Day Chg 0.0015 Vol 11251 Set 1.5532 Op Int 75258

Open

High 1.5558

Low 1.5487

Last 1.5547

Time 04:16 Jun 15 04:16 Jun 15 04:16 Jun 15 04:16 Jun 15 16:25 Jun 14 16:25 Jun 14

Jun'12

1.5552

Sep'12

1.5549

1.5552

1.5480

1.5541

0.0016

33719

1.5525

108896

Dec'12

1.5521 *

1.5522

100

Mar'13

1.5500

1.5500

1.5500

1.5483

-0.0034

1.5517

Jun'13

1.5517 * 1.5517 *

1.5517

Sep'13

1.5517

CME - EURO FUTURES QUOTES 15 JUNE 2012

Current Session Open High Low Last Time 04:25 Jun 15 Chg Vol Prior Day Set Op Int

Jun'12

1.26300

1.26480

1.26140

1.26280

0.00270

17313

1.2601

150389

Sep'12

1.26420

1.26570

1.26230

1.26380

04:25 Jun 15

0.00270

56426

1.2611

310959

Dec'12

1.26610

1.26610

1.26520

1.26520

04:25 Jun 15

0.00250

1.2627

1035

Mar'1 3

1.26460 *

04:24 Jun 15

1.2646

36

Jun'13

1.26650 *

16:24 Jun 14

1.2665

510

Sep'13

1.26850 *

16:24 Jun 14

1.2685

CME - CHF FUTURES QUOTES 15 JUNE 2012

Current Session
Click for Chart

Prior Day Set Chg Vol Set Op Int

Open

High

Low

Last

Time

Jun'12

1.05120

1.05310

1.05050

1.05160

04:33 Jun 15

0.00250

2741

1.04910

43533

Sep'12

1.05410

1.05540

1.05270

1.05400

04:33 Jun 15

0.00250

9802

1.05150

54758

Dec'12

1.05480 * 1.05780 * 1.06190 * 1.06500 *

04:32 Jun 15

1.05480

Mar'13

04:33 Jun 15

1.05780

Jun'13

16:27 Jun 14

1.06190

Sep'13

16:27 Jun 14

1.06500

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.

USD/INR FUTURES CONTRACT SPECIFICATIONS

Underlying The exchange rate in Indian Rupees for a US Dollar
1 (1 unit denotes 1000 USD) 9.00 a.m. to 05.00 p.m. (Mon to Fri) 12 month trading cycle. Last business day of the month 0.25 paise or INR 0.0025 Two working days prior to the last business day of the expiry month at 12 noon Last working day (excluding Saturdays) of the expiry month. The last working day will be the same as that for interbank settlements in Mumbai.

Unit of trading Trading Hours Contract trading cycle Contract Expiration Date Tick Size Last Trading Day

Final settlement day

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
Contract Size Delivery Months Last Trading Day Settlement Day New Contract Listing DINR INR 2,000,000 Monthly contracts for twelve months forward Two Business Days prior to the last working day of the contract month The Business Day immediately following the last day of expiring contract Business day immediately following the last trading day

Price Quote
Tick Size Trading Days Trading Hours Maximum Order Size Price Limit Wholesale Trades

US$ quoted in Cents per 100 Indian Rupees ( e.g. 209.56 /209.62 US Cents per 100 Indian Rupees) US$ 0.000001 per INR or $ 2 per tick Monday through to Friday 08:30 - 23:30 Hours Dubai time (GMT+4)

500 lots for Banks and institutions promoted by Banks. All other entities 200 Lots No Price Limits - Note 1* EFS, EFP, Block trade facilities available

Cash Settlement Price Basis

Open Positions at expiry of contract shall be settled in US Dollars as per the Dialy Settlement Price (DSP) declared by the Exchange. 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 : (1) The qualified banks must be authorized by RBI (2) Must have minimum net worth of Rs.500-crores (3) Minimum CRAR of 10 per cent (4) Net NPA should not exceed 3 per cent (5) Must have earned net profit for last 3 years.

MCX-SX* Currency Futures

As on : June 14, 2012 CONTRACT USDINR Jun-2012 Jul-2012 Aug-2012 OPEN 55.73 56.0575 56.1775 HIGH 55.94 56.23 56.455 LOW 55.6575 55.94 56.1775 CLOSE 55.8475 56.1225 56.3525 VOLUME 1472414 41785 6612 OI 858651 228552 117363

Sep-2012
Oct-2012 Nov-2012 Dec-2012 Jan-2013 Feb-2013 Mar-2013 Apr-2013

56.5
56.705 56.8225 56.95 57.24 57.825 58.1 58

56.63
56.85 57 56.95 57.24 57.825 58.1 58.1725

56.42
56.62 56.8225 56.95 57.24 57.825 57.87 58

56.57
56.77 57 56.95 57.24 57.825 57.87 58.17

681
246 32 6 3 2 1202 102

52379
27405 9315 5165 2275 5883 12302 31321

MCX-SX* Currency Futures

As on : June 14, 2012 Contract EURINR Open High Low Close Vol Qty OI

Jun-2012
Jul-2012 Dec-2012 GBPINR Jun-2012 Jul-2012 Aug-2012

70.02
70.38 70 86.6 86.96 87.2 70.195 70.4525

70.2
70.47 70 86.73 87.0225 87.2 70.46 70.7575

69.945
70.25 70 86.2625 86.59 87.2 70.0325 70.35

70.1475
70.4325 70 86.6825 86.9725 87.2 70.3975 70.715

22885
376 60 10246 296 50 12688 181

26303
3080 1100 16712 3318 349 12550 2448

JPYINR
Jun-2012 Jul-2012

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
EXPECTED SPOT PRICE

Contango

FUTURES PRICE

FUTURES 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 : 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.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:
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. 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 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) 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. 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) To minimize the variance of this, choose hedge ratio given by HR = 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 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)]
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 (Calender Spreads) 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
Cash Settled ? point = .005 = $12.50

Settle Method Point Descriptions Contract Listing

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

Strike Price Interval 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.

INTEREST RATE FUTURES QUOTATIONS 29 JUNE, 2010

____________________________________________
Expiry Month Euribor MAR11 Euribor JUN11 Sterling DEC10 Sterling MAR11 Sterling JUN11 Euro$ Euro$ Euro$ Euro$ Euro Euro Euro AUG10 NOV10 MAR11 JUN11 Open Sett Change High Low Open Interest 503091 353521 363713 326657 302845 11901 545 823929 864090 222300 155336 132474

98.92 98.94 98.87 98.88 99.04 99.04 98.96 98.97 98.84 98.84 99.370 99.245 99.150 99.050 99.39 99.24 99.16 99.07

+0.03 +0.03 +0.01 +0.02 +0.03 -0.005 --+0.010 +0.020

98.96 98.90 99.07 99.01 98.88 99.395 99.245 99.165 99.075

98.92 98.87 99.03 98.96 98.81 99.370 99.235 99.130 99.040

DEC10 99.635 99.645 MAR11 99.640 99.650 JUN11 99.640 99.650

+0.005 99.645 99.635 +0.010 99.650 99.635 +0.010 99.655 99.635

____________________________________________

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

+0-230 +0-230 +0-230 0-000 130-250 130-020 130-020 0-000 129-135 128-225 128-225 0-000 128-015 127-105 127-105

Jun '09) 130-250 Sep '09 Dec '09 129-135 128-015

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.