Interest Rate Futures Contracts 3

Aug 17 10:58 2010 Richard Stooker Print This Article


After the long bond contract,Guest Posting you can trade contracts for T-notes in the 10-year, 5-year and 2-year category.

The 10-year and 5-year notes are very similar to the long bonds. The contracts are for $100,000 and quoted in fractions of par value. One tick is 1/32 of a full point, or $31.25.

However, the exchanges allow the 10-year to be traded in half-ticks, which doesn't really make sense because the word tick is supposed to represent the minimum at which a futures contract can move. However, that's the way it's done.

So one half-tick is worth $15.625. Thus, you can see such quotes as 111'285, meaning that it's at 111'28 and a half.

For the 5-note futures contracts, the standard of $100,000 per contract quoted in fractions of par value with one tick being 1/32 of a full point ($1000) is the same.

However, on the 5-note they allow quarter ticks. So the contract can move just .25/32 or $7.8125.

The two-year note contract is different, however, Its contract value is $200,000, also quoted in fractions of par. It also allows quarter points, which are therefore worth $15.625.

One apparent reason for this disparity is that the United States government issues a lot of debt with a two-year maturity, so it is commonly bought and held. Therefore, the Chicago Board of Trade figured this contract would be used by commercial financial institutions to hedge their portfolios of 2-year T-notes. By making the contracts $200,000, this allows these institutions to save money on commissions, by allowing for economies of scale. Of course, it does make it harder for ordinary traders, especially small ones, to trade this type of contract.

Eurodollar futures represent savings certificates on deposit in commercial banks outside the United States, denominated in U.S. dollars. They have a term of three months, and the rate is based on the London InterBank Offered Rate commonly known as LIBOR.

A Eurodollars futures contract represents $1,000,000. The minimum value is one-fourth of a tick, or $6.25. It is quoted as 100 - Yield.

Eurodollars futures contracts on the CME have the most open interest of any futures in the world -- millions of contracts. Because commercial banks around the world hold lots of U.S. dollars, they need to use these futures to hedge their U.S. dollar portfolios. Plus, they're used to hedge interest rate portfolios.

They constitute an extremely liquid market. It's feasible to trade eurodollar futures for several years into the future, although those contracts move faster than closer months in reaction to changes.

Eurodollars are highly leveraged, but of relatively lower volatility, because LIBOR does not change that often.

Eurodollar futures are traded electronically on the CME Globex.


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Richard Stooker
Richard Stooker

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