You are on page 1of 15

Interest Rate Futures

Chapter 6

Fundamentals of Futures and Options Markets, 5th Edition, Copyright © John C. Hull 2004

6.1

S.2 .Day Count Conventions in the U. Copyright © John C. Hull 2004 6. 5th Edition. (Page 127) Treasury Bonds: Actual/Actual (in period) Corporate Bonds: 30/360 Money Market Instruments: Actual/360 Fundamentals of Futures and Options Markets.

S Cash price = Quoted price + Accrued Interest Fundamentals of Futures and Options Markets.Treasury Bond Price Quotes in the U. Copyright © John C. 5th Edition.3 . Hull 2004 6.

4 . Hull 2004 6. Copyright © John C. 5th Edition.Treasury Bill Quote in the U. If Y is the cash price of a Treasury bill that has n days to maturity the quoted price is 360 (100  Y ) n Fundamentals of Futures and Options Markets.S.

Treasury Bond Futures Pages 131-135 Cash price received by party with short position = Quoted futures price × Conversion factor + Accrued interest Fundamentals of Futures and Options Markets. 5th Edition. Hull 2004 6. Copyright © John C.5 .

Conversion Factor The conversion factor for a bond is approximately equal to the value of the bond on the assumption that the yield curve is flat at 6% with semiannual compounding Fundamentals of Futures and Options Markets. Hull 2004 6. 5th Edition. Copyright © John C.6 .

Hull 2004 6. 5th Edition.CBOT T-Bonds & T-Notes Factors that affect the futures price:  Delivery can be made any time during the delivery month  Any of a range of eligible bonds can be delivered  The wild card play Fundamentals of Futures and Options Markets. Copyright © John C.7 .

25(100-Z)] A change of one basis point or 0.01 in a Eurodollar futures quote corresponds to a contract price change of $25 Fundamentals of Futures and Options Markets. Hull 2004 6.Eurodollar Futures (Page 135-137)   If Z is the quoted price of a Eurodollar futures contract.000[100-0.8 . the value of one contract is 10. Copyright © John C. 5th Edition.

9 . Hull 2004 6. 5th Edition.Eurodollar Futures continued   A Eurodollar futures contract is settled in cash When it expires (on the third Wednesday of the delivery month) Z is set equal to 100 minus the 90 day Eurodollar interest rate (actual/360) and all contracts are closed out Fundamentals of Futures and Options Markets. Copyright © John C.

Forward Rates and Eurodollar Futures (Page 136-137)   Eurodollar futures contracts last as long as 10 years For Eurodollar futures lasting beyond two years we cannot assume that the forward rate equals the futures rate Fundamentals of Futures and Options Markets. Hull 2004 6.10 . 5th Edition. Copyright © John C.

Copyright © John C.Forward Rates and Eurodollar Futures continued A " convexity adjustment" often made is 1 2 Forward rate = Futures rate  W t 1 t 2 2 where t 1 is the time to maturity of the futures contract. 5th Edition. t 2 is the maturity of the rate underlying the futures contract (90 days later than t 1 ) and W is the standard deviation of the short rate changes per year (typically W is about 0.11 .012 ) Fundamentals of Futures and Options Markets. Hull 2004 6.

Copyright © John C.Duration (page 138)  Duration of a bond that provides cash flow c i at time t i is « c i e  yt i » § ti ¬ B ¼ i !1 ­ ½ n  where B is its price and y is its yield (continuously compounded) This leads to (B ! D(y B Fundamentals of Futures and Options Markets.12 . 5th Edition. Hull 2004 6.

Copyright © John C.Duration Continued  When the yield y is expressed with compounding m times per year BD(y (B !  1 y m  The expression D 1 y m is referred to as the ³modified duration´ Fundamentals of Futures and Options Markets. 5th Edition.13 . Hull 2004 6.

5th Edition. Copyright © John C.Duration Matching   This involves hedging against interest rate risk by matching the durations of assets and liabilities It provides protection against small parallel shifts in the zero curve Fundamentals of Futures and Options Markets. Hull 2004 6.14 .

Copyright © John C.15 Fundamentals of Futures and Options Markets. Hull 2004 . 5th Edition.Duration-Based Hedge Ratio PDP FC DF FC DF P DF Contract Price for Interest Rate Futures Duration of Asset Underlying Futures at Maturity Value of portfolio being Hedged Duration of Portfolio at Hedge Maturity 6.