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

The fact that these delivery options are available only to the short seller of futures contracts means that collectively they provide that seller with a series of valuable put options over the underlying bonds or notes. It is therefore instructive to delve more deeply into the nature of these options and their influence on bond futures valuation.

The existence of these options depends upon the futures contract specifications. Examples of the options that can be identified are as follows.

1. The short seller’s option to choose the bonds that will be delivered under the futures contract; this is the so-called ‘quality option‘.
2. The short seller’s option to choose the day of delivery within the delivery month: one form of the so-called ‘timing options‘.

Read more »

Posted: June 18th, 2008 under Future Trading, Futures Contracts, Futures Market.
Comments: 4

Selling Offshore Funds in Germany

This is governed by the Foreign Investment Fund Act of 1969 (the Act) which applies to funds whose shares are distributed to the public, in its widest sense, in Germany and which invest in securities or real estate with the aim of spreading investment risk.

As a result an offshore fund which invests in futures, and options and is specifically excluded from investing in securities or real estate falls outside the Act. This means that an offshore managed futures fund can be sold widely in Germany as long as it complies with the domestic marketing rules laid out in the Act against Unfair Competition.

`Securities‘ are not defined in the Foreign Investment Fund Act but are interpreted, under general principles, as meaning ‘transferable certificates’ of any sort. Thus, it is not the nature of the underlying instruments but the nature of the document representing the relevant instrument which needs to be considered. Since German futures contracts are not in fact transferable (because the contracts are traded on a back-to-back basis as in the US and the UK), they would not be considered to be securities. Read more »

Posted: February 7th, 2008 under Future Fund, Futures Contracts.
Comments: 2

One of the many obstacles placed in the way of institutions in Europe that are keen to use futures and options in their institutional portfolios has been that the trustees responsible for those portfolios would not know how to fulfill their responsibilities in those funds and that performance measurement of such portfolios would be extremely difficult.

In an effort to combat this problem in the UK at least, Liffe and LTOM (the London Traded Options Market, which is now part of Liffe) published their final recommendations for the reporting and performance measurement of financial futures and options in investment portfolios, early in 1992.

These recommendations aimed to lay down a standard for the treatment of futures and options which:

• can be adopted by all parties in the investment industry; and
• demonstrates to pension fund trustees the effect of futures and options on their portfolio performance simply and without further complicating portfolio variations.

Read more »

Posted: February 4th, 2008 under Futures Contracts, Short Futures.
Comments: 5

What Futures Contracts Are

Futures contracts are promises; the person who initially sells the contract promises to deliver a quantity of a standardized commodity to a designated delivery point during a certain month, called the delivery month. The other party to the trade promises to pay a predetermined price for the goods upon delivery. The person who promises to buy is said to be long; the person who promises to deliver is short.’ Read more »

Posted: February 3rd, 2008 under Futures Contracts, Futures Market.
Comments: 1

If you understand the basic principles of hedging and speculating, you will have no trouble applying those concepts to futures contracts on foreign currencies.

Hedging and Speculating with Foreign Currency Futures

We have seen that with the appropriate hedging strategy, farmers can reduce price risk. In the world of international business, another significant risk is foreign exchange risk, or the risk of loss due to shifting relative values in national currencies. The next two chapters will discuss how the futures market enables a portfolio manager to minimize market risk and how bankers can reduce the interest rate risk they face. Read more »

Posted: February 3rd, 2008 under Currency Futures, Futures Contracts, Futures Market, Futures Prices.
Comments: 3

Collapse of the Bretton Woods Agreement

Up to the First World War, the world’s currencies were described either as hard or soft currencies, depending on whether they were convertible into gold at a fixed or floating exchange rate.

In 1945, after the Second World War, the Bretton Woods Agreement was reached and was responsible for keeping a narrow band of fluctuation (2 per cent) between the US dollar, which was pegged and convertible into gold, and other currencies.

By the 1970s it had become impossible to keep so many currencies, each from countries with completely different economic growth rates, within the agreement, and so in 1972 it was abandoned. Read more »

Posted: January 26th, 2008 under Commodities Futures, Currency Futures, Future Exchange, Future Trading, Futures Contracts, Futures Market.
Comments: 2

Development of Derivatives in the UK

The history of derivatives in the UK can be dated back to the arrival of the first centralised commodities market, founded in 1565 by Sir Thomas Greshamand opened by Queen Elizabeth I. It was based in the Royal Exchange (which in 1982 became the first home to the London International Financial Futures Exchange, Liffe) and was run along similar lines to the Amsterdam Trade Centre in the Netherlands, which had opened a few years earlier. Each commodity had a different part of the Exchange from which to trade. Despite the Great Fire in 1666, during which the Exchange building burnt down, commodity trading flourished in the City taking to the coffee houses, while the Royal Exchangewas being rebuilt. Read more »

Posted: January 26th, 2008 under Future Exchange, Future Trading, Futures Market, Futures Prices.
Comments: 2

The financial term ‘derivative’ is a generic term for any instrument which is based on an underlying financial instrument or commodity. The term covers, most commonly, futures and options contracts. For instance, a commodity future is an instrument derived from the commodity markets—the markets which operate for the purchase and sale of corn and other grains, metals, oil and so on. In the same way, an index option is derived from an index.

Confusingly, the name ‘futures‘ is often used in an equally all-encompassing way, and certainly the term ‘managed futures‘ covers the use of all types of derivative products. This report focuses predominantly on managed futures, meaning investment in futures and options instruments. Read more »

Posted: January 26th, 2008 under Commodities Futures, Futures Contracts, Managed Futures.
Comments: 4