As with all other forms of futures contract, the fair price of short-term interest rate futures should preclude any arbitrage possibilities between the futures market and the underlying cash market. In the case of bank deposit interest rate futures, there should be no arbitrage possibilities between the forward interest rate implied by the future and the forward interest rate available on the appropriate type of bank deposit. For example, a three-month eurodollar futures contract that has 135 days to maturity should not provide any arbitrage possibility with the 135-day forward rate on a three-month eurodollar deposit. Read more »

Posted: June 20th, 2008 under Future Trading, Futures Contracts, Futures Market, Futures Prices, Interest Rate Futures.
Comments: 5

It was shown that it is possible to lock in a forward rate of interest. However, depositors will only lock in a forward deposit if the rate that results is at least as favourable as the rate that they expect to prevail at the future point in time. If the forward rate implied by the current rates was above investors’ expectations, theinvestors would increase their borrowing for 90 days, causing upward pressure on that rate, and increase their deposits for 180 days, causing downward pressure on that rate, thereby bringing the 90-day forward rate down to current expected levels.

Conversely, if the implied forward rate were below expectations, investors would borrow for the longer term, raising that rate, and deposit for the shorter term, lowering that rate, until the implied forward rate matched expectations. Read more »

Posted: June 20th, 2008 under Future Exchange, Futures Contracts, Futures Market, Futures Prices, Interest Rate Futures.
Comments: 6

However, this theory of the development of the swaps market assumes that the financial markets remain informationally inefficient and that the benefits of comparative advantage are not arbitraged away. There is no doubt that in the early days of the interest rate and currency swaps markets it was possible to locate such inefficiencies that resulted in generous benefits to both parties, but in the years since the market’s inception the benefits have to some extent been reduced by arbitrage, yet the market still grows dramatically.

Thus there must be some other reason, or reasons, for the existence of the swaps market as the comparative advantage theory assumes that some markets persistently underprice credit risk relative to other markets. Three alternative reasons for the market’s existence can be postulated. Read more »

Posted: June 14th, 2008 under Currency Futures, Foreign Exchange Futures, Future Exchange, Future Investing, Future Management, Future Trading, Interest Rate Futures, Managed Futures, Stock Futures, Stock Market Futures, Swap Futures.
Comments: 4

Direct Participation Programs

The next level up in size and complexity is direct participation programs, or DPPs. You may think of them as tax shelters or limited partnerships (LPs). They are constructed to pass through all of their income, gains, losses, and tax benefits to their owners. The partnership itself pays no taxes because the partners accept liability. Gas-oil exploration and real estate development are common LPs.

Unlike those big sisters, the commodity trading limited partnership is not a tax shelter. It is structured to provide limited liability to investors. The syndicator is the CTA or a CPO, and usually the general partner as well. These can be public or private. Private LPs are usually formed by a small group of wealthy investors, while public LPs attract large numbers of small ($2,000 to $5,000 minimum) investors. The latter requires a full-fledged prospectus and is more stringently watched by federal regulators. Both must be registered with the SEC. Read more »

Posted: March 2nd, 2008 under Corn Futures, Crude Oil Futures, Future Fund, Future Management, Future Trading, Futures, Futures Contracts, Futures Market, Futures Prices, Interest Rate Futures, Managed Futures, S&P Futures, Stock Market Futures, market.
Comments: 4

In considering what makes a futures contract valuable and what makes the price of the contract fluctuate from day to day, it is important to remember that a futures contract is a promise to exchange certain goods at a future date. You must keep your part of the promise unless you get someone to take the promise off your hands (that is, you make a closing transaction). The promised goods are valuable now, and their value in the future may be more or less than their current worth. Prices of commodities change for many reasons, such as new weather forecasts, the availability of substitute commodities, psychological factors, and changes in storage or insurance costs. These factors all involve shifts in demand for a commodity, changes in the supply of the commodity, or both. Read more »

Posted: February 2nd, 2008 under Futures Contracts, Futures Market, Futures Prices, Interest Rate Futures.
Comments: 3