A Note on Interest Rate Futures

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Case Details:

Case Code : MISC011
Case Length : 15 Pages
Period : -
Pub Date : 2003
Teaching Note : Available
Organization : -
Industry : Banking & Financial Services
Countries : -

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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Excerpts

Defining the Terms

To study and understand interest rate futures contracts, one must be familiar with a number of terms. Let us review some of the more commonly used terms. Treasury bill futures are futures contracts on 90-day treasury bills. Eurodollar refers to any dollar-denominated account outside the US...

Hedging Interest Rates Risk with Interest Rate Futures

In futures hedging, an investor enters into a transaction in the futures market today, which he will transact in the cash market in future (Refer Table I). Assume an investor expects a cash inflow after six months and wishes to invest the same in long-term bonds when the cash becomes available...

Short Term Hedging (Hedging the Risk of a Rise in Interest Rates for Obtaining a Predictable Cost of Funds)

The risk of an increase in interest rates can be hedged by selling interest rate futures...

Long-Term Hedging (Hedging the Risk of a Fall in Interest Rates for an Investment)

This form of hedging is used to protect returns on investments made. Assume an investor is expecting a cash inflow and plans to invest the cash when it is received...

Arbitrage with T-Bill Futures

T-Bill future prices are worked out after considering the implication of cost of carry. The cost of carry is the net cost of carrying the commodity forward at a future date...

Spreading with Interest Rate Futures

Traders, who anticipate potential changes in the relative value of two different contracts, may employ a speculative trading strategy known as spread trading. A popular strategy involving the T-Bill futures contract (TB) and the Eurodollar futures contract (ED) is 'TED spreading.'...

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