INTEREST RATE

FUTURES
NKOMO D.J. (FRM)
INTRODUCTION
• A futures contract is an agreement between two parties in which one party, the
buyer; agrees to buy from the other party, the seller; an underlying asset or
other derivative, at a future date at a price agreed on today.
• Interest rate futures contracts are one of the most successful innovations in
futures trading.
• Pioneered in the United States, they have expanded internationally with strong
presence in Great Britain and Singapore.
• The CBOT specializes in contracts with long-term maturity (e.g., 2-year, 5-year
and 10-year T-notes, and 5-year LIBOR-based swaps).
• The CME International Monetary Market (IMM) specializes in contracts with
short-term maturity (e.g., 1-month, and 3-month Eurodollar deposits).
SHORT-TERM INTEREST RATE
FUTURES CONTRACTS
1. Eurodollar Futures
2. Euribor Futures
3. TIEE 28 Futures
4. Treasury Bill Futures
Eurodollar Futures
Eurodollar Futures
1. Eurodollar futures currently dominate the U.S. market for short-term futures
contracts.
2. Rates on Eurodollar deposits are usually based on LIBOR (London Interbank Offer
Rate).
• LIBOR is the rate at which banks are willing to lend funds to other banks in the interbank
market.
3. Eurodollars are U.S. dollar denominated deposits held in a commercial bank outside
the U.S.
4. The Eurodollar contracts is for $1,000,000.
5. A Eurodollar futures contract is based on a time deposit held in a commercial bank
(e.g., 3-month Eurodollar)
6. Eurodollar contracts are non-transferable.
Eurodollar futures
7. Eurodollar futures were the first contract to use cash settlement
rather than delivery of an actual good for contract fulfillment.
8. To establish the settlement rate at the close of trading, the IMM
determines the three-month LIBOR rate.
9. This settlement rate is then used to compute the amount of the cash
payment that must be made.
10.The yield on the Eurodollar contract is quoted on an add-on basis as
follows:
Eurodollar futures
Eurodollar futures
Eurodollar futures
Euribor Futures
• Euribors are Eurodollar time deposits.
• Swaps dealers use Euribor futures to hedge the risk resulting from their
activities.
• Euribor futures are traded at:
• Euronex.liffe
• Contracts are based on a 3-month time deposit with a €1,000,000 notional value.
• Contracts are cash settled at expiration .
• Eurex
• Contracts are based on a 3-month time deposit with a €3,000,000 notional value.
• Contracts are cash-settled at expiration
Euribor Futures
Product Profile: Euronext-Liffe Euribor Futures
Contract Size: 1,000,000 with a three-month maturity.

Deliverable Grades: Cash Settled to Euopean Bankers Federation=s Euribor Offered Rate
(EBF Euribor) for three-month euro time deposits.
Tick Size: .005 percent representing 12.5.

Price Quote: 100 minus the Euribor rate of interest carried out to three decimal places.
Contract Months: March, June, September, and December and four serial months so that 24
delivery months are available for trading, with the nearest six expirations being consecutive
calendar months.
Expiration and final Settlement: The last trading day is two business days prior to the third
Wednesday of the contract month. Final settlement is based on Euopean Bankers Federation=s
Euribor Offered Rate (EBF Euribor) for three-month euro time deposits at 10:00 a.m. London
time on the last trading day.
Trading Hours: 7:00 a.m. to 6:00 p.m.
Daily Price Limit:
TIEE 28 Futures
• The TIEE 28 futures contract is based on the short-term (28-day)
Mexican interest rate.
• The contract is traded on the Mexican Derivatives Exchange (Mercado
Mexicano de Derivados, or MexDer)
• A 28-day TIIE futures contract has a face value of 100,000 Mexican
pesos.
• The contract is cash settled based on the 28-day Interbank
Equilibrium Interest Rate (TIIE), calculated by Banco de México.
TIEE 28 Futures
Treasury Bill Futures
1. A T-bill is issued on behalf of the Government by the Central Bank. It
is the Government borrowing money for a short period of time.
• Treasury bills have original maturities of 13 weeks and 26 weeks.
2. The Treasury bill futures contract calls for the delivery of T-bills
having a face value of $1,000,000 and a time to maturity of 90 days
at the expiration of the futures contract.
• 91-day and 92 day T-bills may also be delivered with a price adjustment.
• The contracts have delivery dates in March, June, September, and December.
• The delivery dates are chosen to make newly issued 13 week T-bills
immediately deliverable against the futures contract.
Treasury Bill Futures
• Price quotations for T-bill futures use the International Monetary
Market Index (IMM).
• IMM Index = 100 - DY
• Where:
• DY = Discount Yield
• Example
• A discount Yield of 7.1% implies an IMM Index of:
• IMM Index = 100 - 7.1
• IMM Index = 92.9
Treasury Bill Futures
• A bill with 90 days to maturity and a 8.32% discount yield, has a price
of $979,200 and a $discount of $20,800. For a futures contract with a
discount yield of 8.32%, the price to be paid for the T-bill at delivery
would be $979,200.
• A one basis point shift implies a $25 change on a $1,000,000, 3-month
futures contract.
• If the futures yield rose to 8.35%, the delivery price would be
$979,125.
PRICING T-BILL FUTURES

Time 0 is today, and time h is the expiration day of the futures contract. The T-bill
underlying the contract is an m-day T-bill. Thus, when the futures expires, the T-bill is
required to have m days to go before maturity. So from our perspective today, the
underlying T-bill is an (h + m)-day T-bill
PRICING T-BILL FUTURES
• To find the spot price of the underlying asset, we need the discount
rate on an (h + m)-day T-bill.
PRICING T-BILL FUTURES

It is important to note that the futures price, not the implied discount rate, is the
more important variable. Like any price, the futures price is determined in a
market of buyers and sellers.
PRICING T-BILL FUTURES
PRICING T-BILL FUTURES
• We now derive the futures price by constructing a risk-free portfolio
that permits no arbitrage profits to be earned. This transaction is
referred to as a cash-and-carry strategy, because the trader buys the
asset in the cash (spot) market and carries (holds) it.
PRICING T-BILL FUTURES
PRICING T-BILL FUTURES
• In words, the futures price is the ratio of the longer-term bill price to
the shorter-term bill price. This price is, in fact, the same as the
forward price from the term structure.
PRICING T-BILL FUTURES
PRICING T-BILL FUTURES
PRICING T-BILL FUTURES
• The implied repo rate is the rate of return implied by the strategy of
buying the asset and selling the futures. The futures price is often
expressed in terms of an implied discount rate.
PRICING T-BILL FUTURES
PRICING T-BILL FUTURES
PRICING T-BILL FUTURES
PRICING T-BILL FUTURES
PRICING T-BILL FUTURES
PRICING T-BILL FUTURES
PRICING T-BILL FUTURES
Exercises
Exercises
Longer-maturity Interest Rate Futures
• Longer-maturity interest rate futures are based on coupon-bearing
debt instruments as the underlying good.
• These instruments require the delivery of an actual bond.
• In this section, long-term interest rate futures contracts will be
examined, including:
1. Treasury Bond Futures
2. Treasury Note Futures
3. Non-US Longer Maturity Interest Rate Futures