Valuing Interest Rate Futures

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Presentation Description

An interest rate future is a futures contract between the buyer and seller to deliver an interest bearing asset, that allows the buyer and seller to lock in the price of the interest bearing asset for a future date. This presentation gives an overview of interest rate future product and pricing model. See more information at http://www.finpricing.com/lib/IrFuture.html

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Presentation Transcript

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Interest Rate Futures and Valuation Dmitry Popov FinPricing http://www.finpricing.com

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Interest Rate Future Summary ◆ Interest Rate Future Definition ◆ Advantages of trading interest rate futures ◆ Valuation ◆ A real world example

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Interest Rate Future Interest Rate Future Definition ◆ An interest rate future is a contract between the buyer and seller to deliver an interest rate asset at a specified rate on a specified date. ◆ The future allows the buyer and seller to lock in the price of the interest rate asset at a future date. ◆ Interest rate futures are usually traded in an exchange. ◆ It is used to hedge against adverse changes in interest rates. ◆ Interest rate futures are mainly listed for 3-month Eurodollar 1-month LIBOR 1-month banker ’s acceptance futures and 3-month banker ’s acceptance futures.

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Interest Rate Future Advantages of trading interest rate futures ◆ Interest rate futures are used to hedge against interest rate risk. ◆ Investors can use interest rate futures to secure an interest rate for money it plans to borrow or lend in the future. ◆ Futures markets tend to be more liquid than underlying cash markets. ◆ Other benefits ◆ Price transparency and liquidity ◆ Immediate execution and confirmation ◆ Reduction of counterparty risk ◆ Centralized clearing.

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Interest Rate Future Valuation ◆ The price of an interest rate future is quoted by the exchange. ◆ A model is mainly used for calculating sensitivities and managing market risk. ◆ The present value of an interest rate future is given by − + where  t – the valuation date  n – the contract size  – day count fraction for period in particular 90 / 360 for 30- month Eurodollar future.

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Interest Rate Future Valuation Cont  T – the maturity of the future contract and also the start date of forward period  – the end date of the forward period  F – the quoted future contract price at the trading date.  100 − + – the future contract price at valuation date t.  – the annually compounded forward yield for the forward period .  C – a constant used to match the market price.

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Interest Rate Future A Real World Example Interest rate future specification Buy Sell Buy Currency USD Contract Size 10000 First Delivery Date 5/30/2018 Last Delivery Date 6/29/2018 Future Maturity Date 6/18/2018 Tenor 3M Future Ticker EDM18 Future Ticker Size 100 Future Ticker Value 25 Number of Contract 100 Quote Price 98.405 Trade Date 12/2/2016

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Thanks You can find more details at http://www.finpricing.com/lib/IrFuture.html

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