73323169-6-Int-Rate-Futures

73323169-6-Int-Rate-Futures - T ER Intere:st Rate Futures...

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TER Intere:st Rate Futures So far we have covered futures contracts on commodities, stock indices, and foreign currencies. We have seen how they work, how they are used for hedging, and how futures prices are set. We now move on to consider interest rate futures. In this chapter we explain the popular Treasury bond and Eurodollar futures contracts that trade in the United States. Many of the other interest rate futures contracts throughout the world have been modeled on these contracts. We also show how interest rate futures contracts, when used in conjunction with the duration measure introduced in Chapter 4, can be used to hedge a company's exposure to interest rate movements. 6.1 DAY COUNT CONVENTIONS As a preliminary to the material in this chapter, we consider day count conventions. The day count defines the way in which interest accrues over time. Generally, we know the interest earned over some reference period (e.g., the time between coupon pay- ments), and we are interested in calculating the interest earned over some other period. The day count convention is usually expressed as X/Yo When we are calculating the interest earned between two dates, X defines the way in which the number of days between the two dates is calculated, and Y defines the way in which the total number of days in the reference period is measured. The interest earned between the two dates is Number of days between dates . . N b f d . fi . d x Interest earned III reference penod um er 0 ays re erence peno Three day count conventions that are commonly used in the United States are: 1. Actual/actual (in period) 2. 30/360 3. Actualj360 129
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130 CHAPTER 6 BetweenFebruary 28, 200 , rch 1, 2005, you have a ch US government bond and a US corporate bond. They p, the same quoted price. Which would you prefer? It sounds as though you should be indifferent, but fact y s marked preference for the corporate bond. Under the 30/360 day coun used for cor orate bonds, there are 3 days between February 28, 2002, a 2002. Unde actual/actual (in period) day count convention used for bonds~ the y 1 day. You would earn approximately t ti interest by ho mg the corporate bond! US Treasury Bonds The actual/actual (in period) day count is used for Treasury bonds in the United States. This means that the interest earned between two dates is based on the ratio of the actual days elapsed to the actual number of days in the period between coupon paym~ts. Suppose that the bond principal is $100, coupon payment dates are March I and September 1, the coupon rate is 8%, and we wish to calculate the interest earned between March 1 and July 3. The reference period is from March 1 to September 1. There are 184 (actual) days in this period, and interest of $4 is earned during the period. There are 124 (actual) days between March 1 and July 3. The interest earned between March I and July 3 is therefore 124 x 4 = 2.6957 184 US Corporate and Municipal Bonds The 30/360 day count is used for corporate and municipal bonds in the United States.
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73323169-6-Int-Rate-Futures - T ER Intere:st Rate Futures...

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