A futures contract is an agreement to make delivery (to sell) or to take delivery (to buy) a specified amount and specific grade or quality of a commodity at a set price at a future date. For example, you’ve header of Treasury futures, gold and silver futures, corn futures, pork bellies, etc. Futures contracts are […]
Futures and Forwards
Features of T-bond Futures and T-note Futures
Treasury bond futures and Treasury note futures traded on the CBOT have the following standard features: T-bonds deliverable grade US Treasury bonds with maturity (or call date) atleast 15 years from delivery date, with an 8% coupon Other T-bonds delivered are converted to the equivalent of the above T-notes deliverable grade US Treasury notes with […]
How Options on Interest Rate Futures Work?
Options on interest rate futures have the following characteristics: The right, but not the obligation, to buy or sell a specific commodity or financial instrument at a specified price for a specified period or on a specified date. When hedging, purchased options provide “insurance” against adverse price movements but offer the flexibility to benefit from […]
Options on Interest Rate Futures – Uses and Benefits
As we know, options on interest rate futures provide the right, but not the obligation, to buy or sell a specific number of futures contracts at a pre-determined price within a specified period of time. We will now learn about some uses of these contracts: Covered Call Writing An investor holding T-bonds or T-notes whose […]
Introduction to Forward Rate Agreements
Forward Rate Agreements (FRA’s) are similar to over-the-counter futures contracts (but there is no margin) or single-period swaps. One party contracts with another for a fixed rate that applies to a future period. The buyer receives a payment if market rates exceed the contract rate, but must pay the seller if market rates fall below […]
Settlement of Futures Contracts
When a futures trader takes a position (long or short) in a futures contract, he can settle the contract in three different ways. Closeout: In this method, the futures trader closes out the futures contract even before the expiry. If he is long a futures contract, he can take a short position in the same […]