Interest Rate Futures

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Interest Rate Futures
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Treasury Bills Futures
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Spot Rate

• The spot rate or theoretical spot is the rate
  that equates the present value of cash flows from
  a portfolio of zero coupon bonds to the market
  value of the couponpaying debt instrument. For
  example, any coupon-paying debt instrument can be
  defined as a portfolio of zero coupon bonds with
  a maturity corresponding to the maturity of the
  coupon that is discounted at a portfolio of spot
  rates.

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Example
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Behavior of spot, forward rates
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Price yield relation
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Term structure of spot/forward
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Inverted yield curve
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Theories of the term structure

• Various theories have been advanced to explain
  the shape of the yield curve.
• Expectation
• Market segmentation
• Liquidity premium
• Preferred habitat

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Bond price volatility
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Duration
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Actual and forecast price
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Exposure to bond
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Example
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Approximate Duration
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Duration and Convexity
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Invoice price of T/bill futures
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Eurodollar futures
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Eurodollar price quote (CME)
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Delivery Process

• Day 1. The short serves notice of intention for
  delivery to the clearinghouse, known as positions
  day.
• Day 2. The clearinghouse notifies both long and
  short and matches the oldest long to the short
  that is expected to deliver and invoice the long,
  known as notice of intention day.
• Day 3. The short delivers the cheapest-to-deliver
  issue to long in return, the long makes payment
  to the short and assumes title to the instrument.

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Cheapest to deliver (CTD) issue
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T/bond Futures
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Synthetic futures/forward
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Hedging with interest rate futures
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Short hedge
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Long Hedge
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Case Study Long Hedge