chapter7 - CHAPTER 7 INTEREST RATE FUTURES In this chapter,...

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Chapter 7 1 CHAPTER 7 INTEREST RATE FUTURES In this chapter, we explore one of the most successful innovations in the history of futures markets; that is, interest rate futures contracts. This chapter is organized into the following sections: 1. Interest Rate Futures Contracts 2. Pricing Interest Rate Futures Contracts 3. Speculating With Interest Rate Futures Contracts 4. Hedging With Interest Rate Futures Contracts
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Chapter 7 2 Interest Rate Futures Introduction Interest rate futures contracts are one of the most successful innovations in futures trading. Pioneered in the United States, they have expanded internationally with strong presence in Great Britain and Singapore. The CBOT specializes in contracts with long-term maturity (e.g., 2-year, 5-year and 10-year T-notes, and 5-year LIBOR-based swaps). The CME International Monetary Market (IMM) specializes in contracts with short-term maturity (e.g., 1-month, and 3- month Eurodollar deposits).
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Chapter 7 3 Short-Term Interest Rates Contracts In this section, four short-term interest rate futures contracts will be examined: 1. Eurodollar Futures 2. Euribor Futures 3. TIEE 28 Futures 4. Treasury Bill Futures
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Chapter 7 4 Eurodollar Futures Product Profile Product Profile: The CME = s Eurodollar Futures Contract Size: Eurodollar Time Deposit having a principal value of $1,000,000 with a three- month maturity. Deliverable Grades: Cash Settled to 3-month Dollar LIBOR Tick Size: 0.01=$25.00 Months 11 thru 40 ; 0.005=$12.50 Months 2 thru 10; 0.0025=$6.25 for nearest expiring month. Price Quote: Price is quoted in terms of the IMM 3-month Eurodollar index, 100 minus the yield on an annual basis for a 360-day year with each basis point worth $25. Contract Months: March, June, September, and December cycle for 10 years Expiration and final Settlement: Eurodollar futures cease trading at 5:00 a.m. Chicago Time (11:00 a.m. London Time) on the second London bank business day immediately preceding the third Wednesday of the contract month; final settlement price is based on the British Bankers = Association Interest Settlement Rate. Trading Hours: Floor: 7:20 a.m.-2:00 p.m; Globex: Mon/Thurs 5:00 p.m.-4:00 p.m.; Shutdown period from 4:00 p.m. to 5:00 p.m. nightly; Sunday & holidays 5:30 p.m.-4:00 p.m. Daily Price Limit: None
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Chapter 7 5 Eurodollar Futures 1. Eurodollar futures currently dominate the U.S. market for short-term futures contracts. 2. Rates on Eurodollar deposits are usually based on LIBOR (London Interbank Offer Rate). LIBOR is the rate at which banks are willing to lend funds to other banks in the interbank market. 3. Eurodollars are U.S. dollar denominated deposits held in a commercial bank outside the U.S. 4. The Eurodollar contracts is for $1,000,000.
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chapter7 - CHAPTER 7 INTEREST RATE FUTURES In this chapter,...

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