Whitepaper. Eurodollar and Euribor Futures in Fixed Income Portfolio Analysis. White Paper

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "Whitepaper. Eurodollar and Euribor Futures in Fixed Income Portfolio Analysis. White Paper"

Transcription

1 White Paper Whitepaper Eurodollar and Euribor Futures in Fixed Income Portfolio Analysis Copyright 2015 FactSet Research Systems Inc. All rights reserved.

2 Eurodollar and Euribor Futures in Fixed Income Portfolio Analysis Contents Introduction... 2 Portfolio and Benchmark Example... 3 Relationship between Eurodollar Futures and Forward Interest Rates... 4 Synthetic Two-Year Security... 5 Eurodollar Futures Hedge Ratio... 6 FactSet Calculations... 8 Attribution of Portfolio and Benchmark s Summary and Conclusions Introduction The 90-day Eurodollar futures contract was launched in December 1981 by the Chicago Mercantile Exchange (CME) as the first cash-settled futures contract. Prior contracts were settled by physical delivery of the commodity or security underlying the contract. Deregulation of financial markets in the early 1980s triggered increased volatility of short-term interest rates. As a result, trading in Eurodollar futures contracts for hedging and speculation became extremely active and liquid. Today, trading volume in Eurodollar futures is the highest among all interest rate futures and options contracts. The contracts were first introduced in a trading pit roughly the size of a football field, but now nearly all of the trading volume occurs electronically. Eurodollar rates, especially 3-month rates, serve as the reference rate for all types of financial transactions and financial products, including personal, commercial, and mortgage loans; interest rate swaps; forward rate agreements; and numerous other instruments. A Eurodollar futures contract is similar to a forward rate agreement to borrow or lend $1,000,000 for three months at the Eurodollar futures rate starting on the contract settlement date. Buying the contract is equivalent to lending money and selling the contract short is equivalent to borrowing money. European Interbank Offer Rate (Euribor ) futures, which trade on the London International Financial Futures and Options Exchange (LIFFE) were launched after the introduction of the euro currency in As with Eurodollars, European banks established a new interbank reference rate within the European Union. Euribor is the rate at which Euro interbank term deposits are offered by one prime bank to another within the Eurozone. Patterned after the Eurodollar futures contract traded at the CME, the Euribor futures contracts were introduced by the LIFFE and quickly became one of the most widely traded and active contracts in Europe. According to the Futures Industry Association, the Copyright 2015 FactSet Research Systems Inc. All rights reserved. 2

3 Euribor futures contract in 2013 was among the top five most actively traded interest rate futures and options contracts. Both the Eurodollar and Euribor futures contracts are used extensively for asset and liability management and for speculation by traders, portfolio managers, and securities dealers. This paper focuses on the use of Eurodollar futures and how FactSet accounts for such contracts in the analysis and attribution of portfolio total returns. For purposes of illustrating how futures are used in asset management, a sample portfolio is introduced as the backdrop for analyzing Eurodollar futures contracts and futures performance. Specifically, Eurodollar futures are added to a portfolio for the purpose of creating a synthetic asset, and the analytics and performance are compared to alternative cash market securities. Basic terms and conventions of the futures contracts are introduced. Futurescash relationships are also explored. The paper then focuses on the calculation of futures total returns and the performance and attribution of a portfolio that includes futures. FactSet s analytics and fixed income attribution model are used to highlight how the futures impact portfolio characteristics and total returns in the context of portfolio management. Portfolio and Benchmark Example For purposes of illustration, a sample portfolio of $10 million of Treasury notes is considered. The portfolio is benchmarked against an intermediate (one- to 10-year) Treasury index. The portfolio holdings include six Treasury securities with durations and convexities shown in Table 1: Table 1: Treasury Portfolio versus Intermediate Treasury Index Durations & Convexities Port vs. Bench Quantity Quantity Port Duration Port Duration Bench Duration Port Convexity Bench Convexity Duration Convexity RG RV TP RJ RH VS America 0.25% 15-sep ,000, America 0.25% 15-dec ,000, America 0.25% 15-sep ,000, America 1.0% 30-sep ,000, America 1.375% 30-sep ,000, America 2.5% 15-aug ,000, The portfolio illustrated in Table 1 includes bonds with maturities ranging from September 2014 to August The portfolio has a weighted average effective duration of 3.15, compared to the index duration of The convexity of the portfolio is slightly less than that of the index. Depending on market conditions and relative pricing between the cash and futures markets, Eurodollar futures can be coupled with money market instruments to create synthetic assets that potentially yield more and have higher total returns than alternative cash market securities. The example explored Copyright 2015 FactSet Research Systems Inc. All rights reserved. 3

4 below and used throughout this paper analyzes one such trade. It compares the portfolio effect of replacing a two-year Treasury note (CUSIP TP in Table 1) with a synthetic security consisting of a 90-day money market instrument coupled with a series of Eurodollar futures contracts. The synthetic security is designed to have an effective duration equal to the two-year Treasury it replaces. The pricing relationship between futures market and cash markets, and the synthetic security versus the Treasury security, are explored below. Relationship between Eurodollar Futures and Forward Interest Rates Futures rates are linked to cash market rates via forward rates implied by the cash market. A forward interest rate is implied by two cash market rates of different maturities. This is illustrated in Figure 1, which shows two investments with six month maturities and the relationship between their cash rates and the corresponding forward rate: 1 Figure 1: Cash and Forward Rates Alternative A: 6-month cash rate Time: now +6 months 3-month cash rate 3-month forward rate Alternative B: Time: now +3 months +6 months Alternative A illustrates a six-month investment with a yield equal to the six-month cash rate. Alternative B also shows a six-month investment, but is composed of two sequential three-month investments. The implied forward rate is the rate that makes the six-month yield on Alternative B equal to Alternative A. It can be calculated from the three- and six-month cash rates. The Eurodollar futures rate tends to equal the forward rate implied by the cash rates on two Eurodollar time deposits, one that matures at the expiration of the futures contract and the other three months later. This tendency is reinforced by the potential for arbitrage between the futures and cash markets. If Eurodollar futures rates are significantly higher than implied forward rates, traders will tend to buy Eurodollar futures against a cash market position, driving futures prices up relative to those in the cash market. Conversely, if futures rates are significantly lower than implied forward rates, sellers will predominate, driving futures prices down relative to cash prices. Roughly speaking, futures are said to be fairly valued when the futures rate is equal to the forward rate, overvalued when the futures rate is less than the forward rate, and undervalued when the futures rate exceeds the forward rate. 2 1 This ignores the spreads that appeared in the market around 2008, and have not gone away. 2 In fact, futures rates are always greater than forward rates. The reason is that daily mark to market payments into and out of the margin account adversely affect the short position (i.e., the Eurodollar futures seller) since withdrawals from the margin account occur when interest rates are low and therefore reinvestment opportunities are correspondingly low. Payments to the margin account occur when interest rates move higher, leading to an extra opportunity cost by tying up these funds in the futures margin account. Technically this effect is called a convexity adjustment. Copyright 2015 FactSet Research Systems Inc. All rights reserved. 4

5 Inequality between futures and forward rates can provide opportunities to create synthetic assets composed of cash and futures positions that yield more than cash market assets, or synthetic liabilities that cost less than cash market liabilities. Additionally, futures may reflect a credit yield spread component relative to riskless assets such as short-term government securities. Synthetic Two-Year Security Conceptually, you can think of a two-year Treasury note as a three-month Treasury bill coupled with a series of three-month forward rates that is equal to the maturity and yield of the Treasury note when taken together. A similar synthetic two-year security can be created by combining a three-month money market instrument with a series of Eurodollar futures contracts, sometimes called a futures strip. Each futures contract establishes the forward rate at which the original investment can be rolled three months later at the expiration of the futures contract. The two-year Treasury note and synthetic security are illustrated in Figure 2: Figure 2: 2-Year Treasury versus 2-Year Synthetic Security 2-Year Treasury Note: 2-Year Treasury rate 2-Year Synthetic Note: 3-Month Eurodollar Futures Contract rates Cash rate EDZ13 EDH14 EDM14 EDU14 EDZ14 EDH15 EDM15 As the illustration suggests, the two-year synthetic note is constructed by combining a three-month money market security with a strip of seven sequential Eurodollar futures contracts, including the December 2013 Eurodollar futures contract (EDZ13), the March 2014 Eurodollar contract (EDH14), and the following five consecutive contracts up to and including the June 2015 contract (EDM15). This combination of cash and futures contracts constitutes the synthetic security. Taken together, the maturity of the synthetic security is 15-Sep-2015, which coincides with the maturity date of the twoyear cash Treasury note (CUSIP TP). The principles underlying the analysis of a two-year synthetic asset are also applicable to liability hedges. For example, consider a European company that sells consumer durables and finances its inventory by issuing euro commercial paper (ECP). Its balance sheet may reflect one- or two-year commercial loans funded by three-month ECP. This creates a maturity gap such that rising short-term rates reduce the net return to operations. One way to reduce the exposure to rising rates is to issue one- or two-year fixed rate note liabilities in the cash market instead of issuing short-term ECP. However, market conditions may force the company to pay a premium for longer term funds. As an alternative, the company could sell a strip of Euribor futures to extend the maturity of its ECP issuance. If ECP rates rise, the net gain on the Euribor strip would at least partially offset the increased cost of reissuing ECP at higher rates. The analysis of a Euribor futures liability strip is similar to the analysis of the Eurodollar futures asset strip, which is the subject of this paper. Copyright 2015 FactSet Research Systems Inc. All rights reserved. 5

6 The specifications of the Eurodollar futures contracts are summarized in Figure 3. Figure 3: Eurodollar Futures Contract Specifications 3 Underlying Instrument Eurodollar interbank time deposit having approximately $1,000,000 principal value, for three-month term to maturity, for spot settlement on the 3rd Wednesday of the contract month. Contract Months Nearest 40 months in the March Quarterly cycle (Mar, Jun, Sep, Dec) plus the nearest four "serial" months not in the March Quarterly cycle. The new March Quarterly month for delivery 10 years hence is listed on the business day following expiration of the nearest March Quarterly contract. Commonly used syntax for the March Quarterly cycle contracts is: H for March, M for June, U for September and Z for December, each followed by the2-digit year. Price Quote 100 minus the three-month London Interbank Offered Rate (LIBOR) for spot settlement on the 3rd Wednesday of the contract month. Example: A price quote of indicates a deposit rate of 1.50 percent per annum. Final Trading Day Second London business day prior to the 3rd Wednesday of the contract month. Trading in expiring contracts terminates at 11:00 a.m. London time on the last day of trading. Settlement Three-month Eurodollar futures are cash settled upon expiration. The Eurodollar futures contract is based on the London Interbank Offered Rate (LIBOR) for 90-day Eurodollar time deposits. Eurodollar time deposits are U.S. dollars on deposit in foreign branches of U.S. banks and in major foreign banks outside the United States. The futures contracts based on these deposits track a three-month rate, which is typically higher than comparable maturity Treasury rates or top-tier CD rates. This is due to the additional country risk and because banks are not required to maintain reserve requirements on Eurodollars, thus allowing a higher rate to be paid on them. As Figure 3 shows, the contract is quoted as an index equal to 100 minus the futures rate. The futures rate reflects interest paid at maturity (i.e., simple interest). Forty contract months trade at any one time and the dollar value of a basis point change in the contract s index is equal to $25.00 ($1,000,000 x.0001 x (90/360)). Eurodollar Futures Hedge Ratio Hedge strategies for assets and liabilities are usually constructed so that the gains/losses on the hedge instrument offset as closely as possible the gains/losses on the cash market position being hedged. To ensure that the futures hedge position performs as expected, it is important to determine the number of futures contracts required using the proper hedge ratio. The number of Eurodollar futures contracts 3 For a complete description of Eurodollar and Euribor futures contract specifications, visit the websites for the Chicago Mercantile Exchange (www.cmegroup.com) for the Eurodollar futures contract and the NYSE Euronext exchange (https://globalderivatives.nyx.com/nyse-liffe) for the Euribor futures contract. Copyright 2015 FactSet Research Systems Inc. All rights reserved. 6

7 needed to hedge the equivalent of a two-year Treasury note is given by a simple formula that relates the size, term, and yield relationship between the Treasury note and Eurodollar contracts: where: H = Face Value $1,000,000 N 90 β + Face Value = the par amount of the Treasury security being hedged + N = the term in days of the Treasury security being hedged + β = the coefficient that reflects the relationship between Treasury yields and LIBOR In the example introduced earlier, the two-year Treasury security (CUSIP TP), is replaced with a three-month money market instrument and a strip of Eurodollar futures contracts beginning with the December 2013 contract. The two-year Treasury has a par value of $2,000,000. You can use the hedge ratio formula to calculate the number of futures contracts needed to replicate the Treasury position. For purposes of the example, it is assumed that the βeta coefficient equals 1, indicating a one-for-one relationship between 3-month Treasury rates and LIBOR rates: 14 = $2, $1,000, There are 638 days between the maturity date of the two-year Treasury (15-Sept-2015) and the maturity date of the December 13 Eurodollar futures contract (16-Dec-2013). Rounded to the nearest integer, a total of 14 Eurodollar futures contracts are needed to match the maturity and interest rate sensitivity of the 2-year Treasury security, but which contracts? Two of the seven consecutive quarterly contracts beginning at the maturity date of the initial three-month investment result in a synthetic security with similar duration characteristics as the two-year Treasury. A hedge constructed according to the above formula will minimize the exposure to outright market risk; however, it will not eliminate all risk. The residual risk, called basis risk, arises from the fact that Eurodollar futures rates may not correlate perfectly with Treasury rates or with rates of other types of assets or liabilities being hedged. Basis risk can add to or detract from hedge performance. The synthetic two-year security, consisting of the three-month money market instrument and the Eurodollar futures strip, is used to replace the two-year Treasury note and Table 2 shows the result within the portfolio: Copyright 2015 FactSet Research Systems Inc. All rights reserved. 7

8 Table 2: Treasury Portfolio Including Eurodollar Strip versus Benchmark Durations & Convexities Port vs. Bench Quantity Bench Relative Weight Port Duration Bench Duration Port Convexity Bench Convexity Duration Convexity RG RV RJ RH VS Bonds Government Of The United States Of America 0.25% 15-sep ,000, Government Of The United States Of America 0.25% 15-dec ,000, Government Of The United States Of America 1.0% 30-sep ,000, Government Of The United States Of America 1.375% 30-sep ,000, Government Of The United States Of America 2.5% 15-aug ,000, Euro Dollar Futures EDZ13 Eurodollar (CME) Dec 13 2,000, EDH14 Eurodollar (CME) Mar 14 2,000, EDM14 Eurodollar (CME) Jun 14 2,000, EDU14 Eurodollar (CME) Sep 14 2,000, EDZ14 Eurodollar (CME) Dec 14 2,000, EDH15 Eurodollar (CME) Mar 15 2,000, EDM15 Eurodollar (CME) Jun 15 2,000, CASH_USD_FUT Futures Cash - U.S. Dollar -13,916, Cash CASH_USD U.S. Dollar 2,000, Notice that the overall portfolio duration and convexity are nearly identical to those shown in Table 1, which represents the Treasury portfolio without futures. This is as expected because the synthetic security was constructed to match the duration and curve characteristics of the two-year Treasury that it replaced. The duration of the three-month money market (shown as U.S. Dollar ) and the durations of each of the futures contracts are 0.25 and sum up to 2.00, nearly identical to the 1.99 duration of the two-year Treasury. As with the Treasury portfolio without futures, the duration of the portfolio with futures is shorter than that of the benchmark by How does the performance of the portfolio without futures compare to the one with futures on a total return basis? FactSet Calculations The real economic value and impact of derivative positions, including Eurodollar and Euribor futures, is best measured by the notional exposure of those securities. The notional exposure approach adjusts for the actual market risk and exposure of futures contracts by decomposing them into a market component and a funding component. In FactSet, the futures market component is measured by the Copyright 2015 FactSet Research Systems Inc. All rights reserved. 8

9 notional value and sensitivities of the futures contracts. The funding component is measured by the corresponding cash offset position. The introduction of the cash offset funding component guarantees that the overall market value of the portfolio is not distorted by the notional exposure of the futures contract. In other words, the weight of the combined position futures and cash offset is zero upon initiation. The notional exposure approach is also used for calculating Eurodollar and Euribor futures total returns. Otherwise, futures returns would be infinite or undefined because futures contracts have zero market value at initiation and very small market values thereafter related only to mark-to-market margin variations. The weight and total return calculations for futures are as follows: Beginning Weight = Notional B i i Notional Bi and = Notional E i Notional Bi Notional Bi where: + Notional Bi = Beginning quantity Price Bi + Notional Ei = Ending quantity Price Ei Portfolio total return is the product of the beginning weights and total returns, across all holdings: ( Notional B i Notional Bi i Portfolio = ) ( Notional E i Notional Bi Notional Bi ) = ( Notional E i Notional Bi ) i Notional Bi For futures, the beginning notional exposures in the equation above cancel out. The return contribution becomes the futures gain/loss divided by the total portfolio market value. Futures generate no coupon or principal cash flows, and therefore, consist entirely of price return. In FactSet, price return is always displayed in local currency terms. In a multi-currency portfolio, total return is reported in a user-selected reporting currency and includes a currency return component: = Price + Currency The currency return is the difference between the total return in the reported currency and the total return in the local currency: Currency = (report currency) (local currency) To calculate total return in a reporting currency that is different than the local currency, FactSet applies an exchange rate adjustment to the local price return as follows: Currency Adjusted = (P e P b ) (P b ) ( FX e FX b ) ( 1 4 ) Copyright 2015 FactSet Research Systems Inc. All rights reserved. 9

10 where: + P e = Ending price + P b = Beginning price + FX e = Ending FX rate + FX b = Beginning FX rate In this paper s example, the reporting currency is U.S. dollars. The total return of the Treasury portfolio without futures versus the intermediate Treasury benchmark is shown in Table 3. The holding period is one month. Table 3: and Contributions for Treasury Portfolio versus Benchmark Port s Port vs. Bench s Price Coupon Cont. to Bench Variation in Price Variation in RG RV TP RJ RH VS BONDS 0.25% 15-sep % 15-dec % 15-sep % 30-sep % 30-sep % 15-aug [Cash] CASH_USD U.S. Dollar As Table 3 shows, the portfolio s total return is 0.54% during the holding period, which is 0.29% less than the benchmark s total return of 0.83%. The portfolio holdings are sorted by maturity; rates declined during the period and the longer duration securities returned more than the shorter duration securities. Now, we substitute the Eurodollar futures strip for the two-year Treasury and compare the performance. Table 4 shows the results when the two-year synthetic security is substituted for the twoyear Treasury note: Copyright 2015 FactSet Research Systems Inc. All rights reserved. 10

11 Table 4: s and Contributions for Portfolio Including Futures Strip versus Benchmark Port s Port vs. Bench s Price Coupon Cont. to Bench Variation in Price Variation in RG RV RJ RH VS Bonds 0.25% 15-sep % 15-dec % 30-sep % 30-sep % 15-aug Euro Dollar Futures EDZ13 Eurodollar (CME) Dec EDH14 Eurodollar (CME) Mar EDM14 Eurodollar (CME) Jun EDU14 Eurodollar (CME) Sep EDZ14 Eurodollar (CME) Dec EDH15 Eurodollar (CME) Mar EDM15 Eurodollar (CME) Jun CASH_USD_FUT Futures Cash - U.S. Dollar Cash CASH_USD U.S. Dollar The portfolio s total return for the holding period increased by 24 basis points to 0.78% compared to the performance shown in Table 3. The money market and Eurodollar futures strip added performance to the portfolio, but how? To investigate this question, we turn to performance attribution. Attribution of Portfolio and Benchmark s FactSet s performance attribution model explains benchmark-relative performance based on factors of attribution, portfolio exposures relative to the benchmark, and changes in market conditions. FactSet provides users with flexibility to choose the attribution factors and how the attribution is displayed. This paper describes a basic approach where the attribution factors are chosen to match portfolio strategy variables commonly employed by fixed income managers. The relationship between those strategy variables and the factors of attribution are summarized in Table 5, which shows the configuration of FactSet s basic attribution model: Copyright 2015 FactSet Research Systems Inc. All rights reserved. 11

12 Table 5: Basic Performance Attribution Factors Portfolio Strategy Strategy Variable Attribution Factor () Interest rates Duration Shift Yield Curve Partial Durations Twist Sector Allocation Sector weight (%) Allocation Bond Selection Bond Weight (%) Selection Currency Currency weight (%) Currency The attribution factors include shift, twist, allocation, selection, and currency. For a full explanation of FactSet s attribution methodology, reporting configurations, and calculation details, see A Flexible Benchmark Relative Method of Attributing s for Fixed Income Portfolios. 4 One advantage of FactSet s approach is that a common methodology and set of calculations are used for all security types, including Eurodollar and Euribor futures. For Eurodollar and Euribor futures, the most relevant factors of attribution are shift and twist since these futures are mainly interest rate sensitive instruments. Shift return is calculated as: Shift = 1 E Duration Δ Shift Point E Convexity (Δ ShiftPoint ) 2 Twist return is calculated as: ( 1 E PartialDuration1 (Δ PartialPoint1 Δ ShiftPoint )) + ( 1 E PartialDuration2 (Δ PartialPoint2 Δ ShiftPoint )) + ( 1 E PartialDuration3 (Δ PartialPoint3 Δ ShiftPoint )) + ( 1 E PartialDurationN (Δ PartialPointN Δ ShiftPoint )) 4 Kwasniewski, Stanley J., CFA A Flexible Benchmark Relative Method of Attributing s for Fixed Income Portfolios. Copyright 2015 FactSet Research Systems Inc. All rights reserved. 12

13 where: + E Duration = Duration + Δ ShiftPoint = Change in the Yield of a UserDefined Yield Curve Shift Point + E Convexity = Convexity + E PartialDuration# = Partial Duration at a Specific Yield Curve Point + Δ PartialPoint# = Change in the Yield of a Specific Yield Curve Point Shift and twist returns represent the portion of total return explained by changes in the level of interest rates and changes in the shape of the yield curve, respectively. Shift and twist returns exclude spread and carry components and are calculated independently of the benchmark. Subtracting shift and twist return from total return results in residual return: Residual = (Shift + Twist ) Residual return represents the portion of unexplained total return. It includes return components such as spread, income, paydown, carry (accretion and roll down), volatility, inflation, and basis. 5 Residual returns for Eurodollar and Euribor futures are mainly comprised of a credit spread component (i.e., LIBOR vs. Treasury). In this case, residual returns are used to quantify allocation and selection effects, both of which are calculated relative to the benchmark as follows: Allocation = [(W i W i ) (RR i RR)] i where: Selection = [W i (RR i RR i )] i + W i = Weight of Group i in Portfolio + W i = Weight of Group i in Benchmark + RR i = Residual of Group i in Benchmark + RR = Overall Benchmark Residual + RR i = Residual of Group i in Portfolio ing to the portfolio example, Table 6 shows basic performance attribution for the portfolio without futures versus the benchmark: 5 These components, with the exception of volatility and basis, comprise the optional factors in FactSet s fixed income attribution model. Clients who wish to analyze the full range of total return components can add these additional attribution factors to their analysis. For a full description of this methodology, please see A Flexible Benchmark Relative Method of Attributing s for Fixed Income Portfolios. Copyright 2015 FactSet Research Systems Inc. All rights reserved. 13

14 Table 6: Basic Attribution of Portfolio Excluding Eurodollar Futures versus Benchmark s Attribution Port. Bench. Variation in Shift Twist Allocation Selection RV RG TP RJ RH VS % 15-dec % 15-sep % 15-sep % 30-sep % 30-sep % 15-aug As described earlier, the duration of the Treasury portfolio is 0.42 shorter than the intermediate Treasury benchmark. Reflecting the two-year point of the Treasury curve, the yield declined by 7 basis points over the holding period. As a result, the shift effect was -0.03%. At the portfolio level, the twist effect was -0.07% because the yield curve exposure of the portfolio was more sensitive to changes on the short end of the curve, which rose over the measurement period. The allocation effect was -0.09% because the Treasuries in the portfolio that were overweighted underperformed the benchmark s overall Treasury sector residual return. Finally, the selection effect was 0.00% because the residual returns of the Treasuries held in the portfolio were generally identical to those held in the benchmark. In summary, the portfolio underperformed the index by -0.19% due primarily to asset allocation and curve positioning bets. The attribution was repeated for the portfolio including Eurodollar futures. The results are shown in Table 7: Copyright 2015 FactSet Research Systems Inc. All rights reserved. 14

15 Table 7: Basic Attribution of Portfolio Including Eurodollar Futures versus Benchmark s Attribution Port. Bench. Variation in Shift Twist Allocation Selection RV RG RJ RH VS America 0.25% 15-dec America 0.25% 15-sep America 1.0% 30-sep America 1.375% 30-sep America 2.5% 15-aug EDZ13 Eurodollar (CME) Dec EDH14 Eurodollar (CME) Mar EDM14 Eurodollar (CME) Jun EDU14 Eurodollar (CME) Sep EDZ14 Eurodollar (CME) Dec EDH15 Eurodollar (CME) Mar EDM15 Eurodollar (CME) Jun CASH_USD_FUT Futures Cash - U.S. Dollar CASH_USD U.S. Dollar _ By comparing Table 7 (including futures) to Table 6 (excluding futures), it is noteworthy that the shift and twist effects are unchanged. This is expected because the Eurodollar futures synthetic security was designed to have the same duration and curve characteristics as the two-year Treasury it replaced. The allocation effect was more positive for the portfolio including futures compared to the portfolio excluding Eurodollar futures. The allocation impact was positive because Eurodollar futures are based on 3-month LIBOR, which has a yield spread component that Treasuries do not have and LIBOR spreads to Treasuries tightened during the holding period. As a result, the allocation effect increased from 0.07% to 0.05% shown in Table 7. In summary, the Eurodollar futures strip had a positive impact on the portfolio relative to benchmark, reducing the portfolio s underperformance to -0.05% from -0.19%. Summary and Conclusions Eurodollar and Euribor futures contracts are often used by traders and portfolio managers to create short-term synthetic assets, hedge short-term liabilities, or purely for speculation. Because the futures contracts are derivative instruments, FactSet applies a notional-exposure approach to measure their portfolio effects, including analytics, returns, and attribution. Futures are coupled with futures cash offset positions so that the combined positions net out and do not distort the market value and weight relationships of the portfolio. In this approach, futures contribute to the interest rate sensitivities and their profit and losses contribute to overall portfolio performance. The analytics and returns computed by FactSet constitute the basis for calculating performance attribution for portfolios that include futures versus benchmarks. Copyright 2015 FactSet Research Systems Inc. All rights reserved. 15

16 As this paper shows, the attribution of relative portfolio performance can be calculated and reported at a basic level that relates the factors of attribution to primary investment strategies or on a more advanced level by enabling a high degree of user choice and configuration of attribution factors. Whichever approach is taken, FactSet accurately measures and accounts for the impact of Eurodollar and Euribor futures within the context of portfolio analysis and performance attribution. Copyright 2015 FactSet Research Systems Inc. All rights reserved. 16

Whitepaper. Government Note and Bond Futures in Fixed Income Portfolio Analysis. White Paper

Whitepaper. Government Note and Bond Futures in Fixed Income Portfolio Analysis. White Paper White Paper Whitepaper Government Note and Bond Futures in Fixed Income Portfolio Analysis Copyright 2015 FactSet Research Systems Inc. All rights reserved. Government Note and Bond Futures in Fixed Income

More information

Options on 10-Year U.S. Treasury Note & Euro Bund Futures in Fixed Income Portfolio Analysis

Options on 10-Year U.S. Treasury Note & Euro Bund Futures in Fixed Income Portfolio Analysis White Paper Whitepaper Options on 10-Year U.S. Treasury Note & Euro Bund Futures in Fixed Income Portfolio Analysis Copyright 2015 FactSet Research Systems Inc. All rights reserved. Options on 10-Year

More information

Interest Rate Swaps and Fixed Income Portfolio Analysis

Interest Rate Swaps and Fixed Income Portfolio Analysis White Paper Interest Rate Swaps and Fixed Income Portfolio Analysis Copyright 2014 FactSet Research Systems Inc. All rights reserved. Interest Rate Swaps and Fixed Income Portfolio Analysis Contents Introduction...

More information

White Paper. Whitepaper. Currency Forwards in Fixed Income Portfolio Analysis. Copyright 2016 FactSet Research Systems Inc. All rights reserved.

White Paper. Whitepaper. Currency Forwards in Fixed Income Portfolio Analysis. Copyright 2016 FactSet Research Systems Inc. All rights reserved. White Paper Whitepaper Forwards in Fixed Income Portfolio Analysis Copyright 2016 FactSet Research Systems Inc. All rights reserved. Forwards in Fixed Income Portfolio Analysis Contents Introduction...

More information

Eurodollar Futures, and Forwards

Eurodollar Futures, and Forwards 5 Eurodollar Futures, and Forwards In this chapter we will learn about Eurodollar Deposits Eurodollar Futures Contracts, Hedging strategies using ED Futures, Forward Rate Agreements, Pricing FRAs. Hedging

More information

Learning Curve Interest Rate Futures Contracts Moorad Choudhry

Learning Curve Interest Rate Futures Contracts Moorad Choudhry Learning Curve Interest Rate Futures Contracts Moorad Choudhry YieldCurve.com 2004 Page 1 The market in short-term interest rate derivatives is a large and liquid one, and the instruments involved are

More information

The TED spread trade: illustration of the analytics using Bloomberg

The TED spread trade: illustration of the analytics using Bloomberg The TED spread trade: illustration of the analytics using Bloomberg Aaron Nematnejad January 2003 1 The views, thoughts and opinions expressed in this article represent those of the author in his individual

More information

CHAPTER 11 CURRENCY AND INTEREST RATE FUTURES

CHAPTER 11 CURRENCY AND INTEREST RATE FUTURES Answers to end-of-chapter exercises ARBITRAGE IN THE CURRENCY FUTURES MARKET 1. Consider the following: Spot Rate: $ 0.65/DM German 1-yr interest rate: 9% US 1-yr interest rate: 5% CHAPTER 11 CURRENCY

More information

Chapter 5 Financial Forwards and Futures

Chapter 5 Financial Forwards and Futures Chapter 5 Financial Forwards and Futures Question 5.1. Four different ways to sell a share of stock that has a price S(0) at time 0. Question 5.2. Description Get Paid at Lose Ownership of Receive Payment

More information

Creating Forward-Starting Swaps with DSFs

Creating Forward-Starting Swaps with DSFs INTEREST RATES Creating -Starting Swaps with s JULY 23, 2013 John W. Labuszewski Managing Director Research & Product Development 312-466-7469 jlab@cmegroup.com CME Group introduced its Deliverable Swap

More information

MONEY MARKET FUTURES. FINANCE TRAINER International Money Market Futures / Page 1 of 22

MONEY MARKET FUTURES. FINANCE TRAINER International Money Market Futures / Page 1 of 22 MONEY MARKET FUTURES 1. Conventions and Contract Specifications... 3 2. Main Markets of Money Market Futures... 7 3. Exchange and Clearing House... 8 4. The Margin System... 9 5. Comparison: Money Market

More information

CHAPTER 22: FUTURES MARKETS

CHAPTER 22: FUTURES MARKETS CHAPTER 22: FUTURES MARKETS PROBLEM SETS 1. There is little hedging or speculative demand for cement futures, since cement prices are fairly stable and predictable. The trading activity necessary to support

More information

Learning Curve Forward Rate Agreements Anuk Teasdale

Learning Curve Forward Rate Agreements Anuk Teasdale Learning Curve Forward Rate Agreements Anuk Teasdale YieldCurve.com 2004 Page 1 In this article we review the forward rate agreement. Money market derivatives are priced on the basis of the forward rate,

More information

A Flexible Benchmark Relative Method of Attributing Returns for Fixed Income Portfolios

A Flexible Benchmark Relative Method of Attributing Returns for Fixed Income Portfolios White Paper A Flexible Benchmark Relative Method of Attributing s for Fixed Income Portfolios By Stanley J. Kwasniewski, CFA Copyright 2013 FactSet Research Systems Inc. All rights reserved. A Flexible

More information

Assumptions: No transaction cost, same rate for borrowing/lending, no default/counterparty risk

Assumptions: No transaction cost, same rate for borrowing/lending, no default/counterparty risk Derivatives Why? Allow easier methods to short sell a stock without a broker lending it. Facilitates hedging easily Allows the ability to take long/short position on less available commodities (Rice, Cotton,

More information

Chapter 4 Interest Rates. Options, Futures, and Other Derivatives 8th Edition, Copyright John C. Hull

Chapter 4 Interest Rates. Options, Futures, and Other Derivatives 8th Edition, Copyright John C. Hull Chapter 4 Interest Rates 1 Types of Rates Treasury rates LIBOR rates Repo rates 2 Treasury Rates Rates on instruments issued by a government in its own currency 3 LIBOR and LIBID LIBOR is the rate of interest

More information

In terms of expected returns, MSFT should invest in the U.K.

In terms of expected returns, MSFT should invest in the U.K. Rauli Susmel Dept. of Finance Univ. of Houston FINA 4360 International Financial Management 12/4/02 Chapter 21 Short-term Investing MNCs have many choices for investing Home return(usd) = deposit interest

More information

LOCKING IN TREASURY RATES WITH TREASURY LOCKS

LOCKING IN TREASURY RATES WITH TREASURY LOCKS LOCKING IN TREASURY RATES WITH TREASURY LOCKS Interest-rate sensitive financial decisions often involve a waiting period before they can be implemen-ted. This delay exposes institutions to the risk that

More information

FIN 472 Fixed-Income Securities Forward Rates

FIN 472 Fixed-Income Securities Forward Rates FIN 472 Fixed-Income Securities Forward Rates Professor Robert B.H. Hauswald Kogod School of Business, AU Interest-Rate Forwards Review of yield curve analysis Forwards yet another use of yield curve forward

More information

Equity-index-linked swaps

Equity-index-linked swaps Equity-index-linked swaps Equivalent to portfolios of forward contracts calling for the exchange of cash flows based on two different investment rates: a variable debt rate (e.g. 3-month LIBOR) and the

More information

Hedging Borrowing Costs with Eurodollar Futures

Hedging Borrowing Costs with Eurodollar Futures Hedging Borrowing Costs with Eurodollar Futures DTN/The Progressive Farmer 2010 Ag Summit December 9, 2010 James Boudreault, CFA Financial Research & Product Development CME Group Agenda 1. Introduction

More information

Interest Rate Futures. Chapter 6

Interest Rate Futures. Chapter 6 Interest Rate Futures Chapter 6 1 Day Count Convention The day count convention defines: The period of time to which the interest rate applies. The period of time used to calculate accrued interest (relevant

More information

CHAPTER 23: FUTURES, SWAPS, AND RISK MANAGEMENT

CHAPTER 23: FUTURES, SWAPS, AND RISK MANAGEMENT CHAPTER 23: FUTURES, SWAPS, AND RISK MANAGEMENT PROBLEM SETS 1. In formulating a hedge position, a stock s beta and a bond s duration are used similarly to determine the expected percentage gain or loss

More information

FIXED-INCOME SECURITIES. Chapter 11. Forwards and Futures

FIXED-INCOME SECURITIES. Chapter 11. Forwards and Futures FIXED-INCOME SECURITIES Chapter 11 Forwards and Futures Outline Futures and Forwards Types of Contracts Trading Mechanics Trading Strategies Futures Pricing Uses of Futures Futures and Forwards Forward

More information

VALUATION OF PLAIN VANILLA INTEREST RATES SWAPS

VALUATION OF PLAIN VANILLA INTEREST RATES SWAPS Graduate School of Business Administration University of Virginia VALUATION OF PLAIN VANILLA INTEREST RATES SWAPS Interest-rate swaps have grown tremendously over the last 10 years. With this development,

More information

ASSET LIABILITY MANAGEMENT Significance and Basic Methods. Dr Philip Symes. Philip Symes, 2006

ASSET LIABILITY MANAGEMENT Significance and Basic Methods. Dr Philip Symes. Philip Symes, 2006 1 ASSET LIABILITY MANAGEMENT Significance and Basic Methods Dr Philip Symes Introduction 2 Asset liability management (ALM) is the management of financial assets by a company to make returns. ALM is necessary

More information

Chapter 4 Interest Rates. Options, Futures, and Other Derivatives 9th Edition, Copyright John C. Hull

Chapter 4 Interest Rates. Options, Futures, and Other Derivatives 9th Edition, Copyright John C. Hull Chapter 4 Interest Rates 1 Types of Rates! Treasury rate! LIBOR! Fed funds rate! Repo rate 2 Treasury Rate! Rate on instrument issued by a government in its own currency 3 LIBOR! LIBOR is the rate of interest

More information

a. On what day would the 1% filter rule have issued its first signal? Was this a buy or a sell signal? At what price did the trade occur?

a. On what day would the 1% filter rule have issued its first signal? Was this a buy or a sell signal? At what price did the trade occur? Answers to Chapter #7 Exercises 1. Examine the daily closing price data on the DM/$ rate in file E07.WK1 that was used to construct Figure 7.5. Suppose you were using a 1% filter rule to trade the DM and

More information

Hedging with Futures and Options: Supplementary Material. Global Financial Management

Hedging with Futures and Options: Supplementary Material. Global Financial Management Hedging with Futures and Options: Supplementary Material Global Financial Management Fuqua School of Business Duke University 1 Hedging Stock Market Risk: S&P500 Futures Contract A futures contract on

More information

Fixed-Income Securities. Assignment

Fixed-Income Securities. Assignment FIN 472 Professor Robert B.H. Hauswald Fixed-Income Securities Kogod School of Business, AU Assignment Please be reminded that you are expected to use contemporary computer software to solve the following

More information

A Flexible Benchmark-Relative Method of Attributing Returns for Balanced Portfolios

A Flexible Benchmark-Relative Method of Attributing Returns for Balanced Portfolios White Paper A Flexible Benchmark-Relative Method of Attributing Returns for Balanced Portfolios By Stanley J. Kwasniewski, CFA Copyright 2016 FactSet Research Systems Inc. All rights reserved. www.factset.com

More information

OPTIONS ON SHORT-TERM INTEREST RATE FUTURES*

OPTIONS ON SHORT-TERM INTEREST RATE FUTURES* OPTIONS ON SHORT-TERM INTEREST RATE FUTURES* Anatoli Kuprianov Options are contracts that give their owners the right, but not the obligation, to buy or sell a specified item at a set price on or before

More information

Trading the Yield Curve. Copyright 1999-2006 Investment Analytics

Trading the Yield Curve. Copyright 1999-2006 Investment Analytics Trading the Yield Curve Copyright 1999-2006 Investment Analytics 1 Trading the Yield Curve Repos Riding the Curve Yield Spread Trades Coupon Rolls Yield Curve Steepeners & Flatteners Butterfly Trading

More information

Fixed Income Portfolio Management. Interest rate sensitivity, duration, and convexity

Fixed Income Portfolio Management. Interest rate sensitivity, duration, and convexity Fixed Income ortfolio Management Interest rate sensitivity, duration, and convexity assive bond portfolio management Active bond portfolio management Interest rate swaps 1 Interest rate sensitivity, duration,

More information

MCQ on International Finance

MCQ on International Finance MCQ on International Finance 1. If portable disk players made in China are imported into the United States, the Chinese manufacturer is paid with a) international monetary credits. b) dollars. c) yuan,

More information

The Short Dated Interest Rate Market Trading JIBAR Futures

The Short Dated Interest Rate Market Trading JIBAR Futures JOHANNESBURG STOCK EXCHANGE Interest Rates The Short Dated Interest Rate Market Trading JIBAR Futures JIBAR Futures are Short Term Interest Rate (STIR) Futures based on the 3-month JIBAR (Johannesburg

More information

Swap Rate Curve Strategies with Deliverable Interest Rate Swap Futures

Swap Rate Curve Strategies with Deliverable Interest Rate Swap Futures Swap Rate Curve Strategies with Deliverable Interest Rate Swap By James Boudreault, CFA Research & Product Development Table of Contents I. Introduction II. Swap Curve: Level, Slope, and Shape III. Trading

More information

Answers to End-of-Chapter Questions

Answers to End-of-Chapter Questions Answers to End-of-Chapter Questions 1. Because for any given price at expiration, a lower strike price means a higher profit for a call option and a lower profit for a put option. A lower strike price

More information

Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world

Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Visit us on the World Wide Web at: www.pearsoned.co.uk Pearson Education Limited 2014

More information

Interest rate Derivatives

Interest rate Derivatives Interest rate Derivatives There is a wide variety of interest rate options available. The most widely offered are interest rate caps and floors. Increasingly we also see swaptions offered. This note will

More information

FIN 472 Fixed-Income Securities Forward Rates

FIN 472 Fixed-Income Securities Forward Rates FIN 472 Fixed-Income Securities Forward Rates Professor Robert B.H. Hauswald Kogod School of Business, AU Interest-Rate Forwards Review of yield curve analysis Forwards yet another use of yield curve forward

More information

Swaps: complex structures

Swaps: complex structures Swaps: complex structures Complex swap structures refer to non-standard swaps whose coupons, notional, accrual and calendar used for coupon determination and payments are tailored made to serve client

More information

Introduction to swaps

Introduction to swaps Introduction to swaps Steven C. Mann M.J. Neeley School of Business Texas Christian University incorporating ideas from Teaching interest rate and currency swaps" by Keith C. Brown (Texas-Austin) and Donald

More information

3. Market risks and derivatives. Foreign currency risk management

3. Market risks and derivatives. Foreign currency risk management 3. Market risks and derivatives The Company is exposed to a variety of financial risks: market risks (including foreign currency exchange risk and interest rate risk), credit risk, liquidity and capital

More information

550.444 Introduction to Financial Derivatives

550.444 Introduction to Financial Derivatives 550.444 Introduction to Financial Derivatives Week of October 7, 2013 Interest Rate Futures Where we are Last week: Forward & Futures Prices/Value (Chapter 5, OFOD) This week: Interest Rate Futures (Chapter

More information

SEF Rule 802 Credit Derivatives Product Descriptions

SEF Rule 802 Credit Derivatives Product Descriptions SEF Rule 802 Credit Derivatives Product Descriptions Products Rule 802 (1) Credit Derivatives Indices (2) Credit Derivatives Tranches (3) [Reserved] (4) IOS Index Credit Default Swaps (5) iboxx Total Return

More information

Chapter 1 - Introduction

Chapter 1 - Introduction Chapter 1 - Introduction Derivative securities Futures contracts Forward contracts Futures and forward markets Comparison of futures and forward contracts Options contracts Options markets Comparison of

More information

CHAPTER 9 INTERNATIONAL FINANCIAL MARKETS

CHAPTER 9 INTERNATIONAL FINANCIAL MARKETS CHAPTER 9 INTERNATIONAL FINANCIAL MARKETS LEARNING OBJECTIVES: 1. Discuss the purposes, development, and financial centers of the international capital market. 2. Describe the international bond, international

More information

Introduction to Interest Rate Trading. Andrew Wilkinson

Introduction to Interest Rate Trading. Andrew Wilkinson Introduction to Interest Rate Trading Andrew Wilkinson Risk Disclosure Futures are not suitable for all investors. The amount you may lose may be greater than your initial investment. Before trading futures,

More information

INTEREST RATE SWAPS September 1999

INTEREST RATE SWAPS September 1999 INTEREST RATE SWAPS September 1999 INTEREST RATE SWAPS Definition: Transfer of interest rate streams without transferring underlying debt. 2 FIXED FOR FLOATING SWAP Some Definitions Notational Principal:

More information

BAX TM Three-Month Canadian Bankers Acceptance Futures

BAX TM Three-Month Canadian Bankers Acceptance Futures BAX TM Three-Month Canadian Bankers Acceptance Futures TMX Group Equities Toronto Stock Exchange TSX Venture Exchange Equicom Derivatives Montréal Exchange CDCC Montréal Climate Exchange Fixed Income Shorcan

More information

Derivatives Interest Rate Futures. Professor André Farber Solvay Brussels School of Economics and Management Université Libre de Bruxelles

Derivatives Interest Rate Futures. Professor André Farber Solvay Brussels School of Economics and Management Université Libre de Bruxelles Derivatives Interest Rate Futures Professor André Farber Solvay Brussels School of Economics and Management Université Libre de Bruxelles Interest Rate Derivatives Forward rate agreement (FRA): OTC contract

More information

Advanced forms of currency swaps

Advanced forms of currency swaps Advanced forms of currency swaps Basis swaps Basis swaps involve swapping one floating index rate for another. Banks may need to use basis swaps to arrange a currency swap for the customers. Example A

More information

Total return swaps (TRS)

Total return swaps (TRS) Total return swaps (TRS) DEFINITION Total return swap is the generic name for a bilateral financial contract where one party, the total return payer, agrees to make floating payment equal to the total

More information

1.2 Structured notes

1.2 Structured notes 1.2 Structured notes Structured notes are financial products that appear to be fixed income instruments, but contain embedded options and do not necessarily reflect the risk of the issuing credit. Used

More information

Using Derivatives in the Fixed Income Markets

Using Derivatives in the Fixed Income Markets Using Derivatives in the Fixed Income Markets A White Paper by Manning & Napier www.manning-napier.com Unless otherwise noted, all figures are based in USD. 1 Introduction While derivatives may have a

More information

Hedging Strategies with Treasury Bond Futures

Hedging Strategies with Treasury Bond Futures Hedging Strategies with Treasury Bond Futures Finance 7523. Spring 1999 Dr. Steven C. Mann M.J. Neeley School of Business Texas Christian University Mann web page The Chicago Board of Trade T-Bond Futures

More information

Pricing and Strategy for Muni BMA Swaps

Pricing and Strategy for Muni BMA Swaps J.P. Morgan Management Municipal Strategy Note BMA Basis Swaps: Can be used to trade the relative value of Libor against short maturity tax exempt bonds. Imply future tax rates and can be used to take

More information

Understanding Futures on the DTCC GCF Repo Index

Understanding Futures on the DTCC GCF Repo Index Understanding Futures on the DTCC GCF Repo Index White Paper June 2014 This material may not be reproduced or redistributed in whole or in part without the express, prior written consent of Intercontinental

More information

Caput Derivatives: October 30, 2003

Caput Derivatives: October 30, 2003 Caput Derivatives: October 30, 2003 Exam + Answers Total time: 2 hours and 30 minutes. Note 1: You are allowed to use books, course notes, and a calculator. Question 1. [20 points] Consider an investor

More information

CHAPTER 22: FUTURES MARKETS

CHAPTER 22: FUTURES MARKETS CHAPTER 22: FUTURES MARKETS 1. a. The closing price for the spot index was 1329.78. The dollar value of stocks is thus $250 1329.78 = $332,445. The closing futures price for the March contract was 1364.00,

More information

Portfolio Margining. Unparalleled Capital Efficiencies for Interest Rate Swap Portfolios CME Group. All rights reserved.

Portfolio Margining. Unparalleled Capital Efficiencies for Interest Rate Swap Portfolios CME Group. All rights reserved. Portfolio Margining Unparalleled Capital Efficiencies for Interest Rate Swap Portfolios Portfolio Margining IRS and CME Group Futures Unparalleled Margin Efficiencies for a Capital Constrained World Background

More information

CBOT Soybean Crush. Reference Guide

CBOT Soybean Crush. Reference Guide CBOT Soybean Crush Reference Guide Introduction In the soybean industry, the term crush refers both to a physical process as well as a value calculation. The physical crush is the process of converting

More information

Money market portfolio

Money market portfolio 1 Money market portfolio April 11 Management of Norges Bank s money market portfolio Report for the fourth quarter 1 Contents 1 Key figures Market value and return 3 3 Market risk and management guidelines

More information

TREATMENT OF PREPAID DERIVATIVE CONTRACTS. Background

TREATMENT OF PREPAID DERIVATIVE CONTRACTS. Background Traditional forward contracts TREATMENT OF PREPAID DERIVATIVE CONTRACTS Background A forward contract is an agreement to deliver a specified quantity of a defined item or class of property, such as corn,

More information

Finance 350: Problem Set 6 Alternative Solutions

Finance 350: Problem Set 6 Alternative Solutions Finance 350: Problem Set 6 Alternative Solutions Note: Where appropriate, the final answer for each problem is given in bold italics for those not interested in the discussion of the solution. I. Formulas

More information

Fundamentals of Futures and Options (a summary)

Fundamentals of Futures and Options (a summary) Fundamentals of Futures and Options (a summary) Roger G. Clarke, Harindra de Silva, CFA, and Steven Thorley, CFA Published 2013 by the Research Foundation of CFA Institute Summary prepared by Roger G.

More information

Single Name Credit Derivatives:

Single Name Credit Derivatives: Single ame Credit Derivatives: Products & Valuation Stephen M Schaefer London Business School Credit Risk Elective Summer 2012 Objectives To understand What single-name credit derivatives are How single

More information

End-of-chapter Questions for Practice (with Answers)

End-of-chapter Questions for Practice (with Answers) MFIN6003 Derivative Securities Dr. Huiyan Qiu End-of-chapter Questions for Practice (with Answers) Following is a list of selected end-of-chapter questions for practice from McDonald s Derivatives Markets.

More information

Money Market and Debt Instruments

Money Market and Debt Instruments Prof. Alex Shapiro Lecture Notes 3 Money Market and Debt Instruments I. Readings and Suggested Practice Problems II. Bid and Ask III. Money Market IV. Long Term Credit Markets V. Additional Readings Buzz

More information

CHAPTER 7 FUTURES AND OPTIONS ON FOREIGN EXCHANGE SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS

CHAPTER 7 FUTURES AND OPTIONS ON FOREIGN EXCHANGE SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS CHAPTER 7 FUTURES AND OPTIONS ON FOREIGN EXCHANGE SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS QUESTIONS 1. Explain the basic differences between the operation of a currency

More information

In this chapter we will learn about. Treasury Notes and Bonds, Treasury Inflation Protected Securities,

In this chapter we will learn about. Treasury Notes and Bonds, Treasury Inflation Protected Securities, 2 Treasury Securities In this chapter we will learn about Treasury Bills, Treasury Notes and Bonds, Strips, Treasury Inflation Protected Securities, and a few other products including Eurodollar deposits.

More information

THE RELATIONSHIP BETWEEN MSCI EMERGING MARKETS INDEX, mini MSCI EMERGING MARKETS INDEX FUTURES AND THE ishares MSCI EMERGING MARKETS ETF

THE RELATIONSHIP BETWEEN MSCI EMERGING MARKETS INDEX, mini MSCI EMERGING MARKETS INDEX FUTURES AND THE ishares MSCI EMERGING MARKETS ETF WHITE PAPER THE RELATIONSHIP BETWEEN MSCI EMERGING MARKETS INDEX, mini MSCI EMERGING MARKETS INDEX FUTURES AND THE ishares MSCI EMERGING MARKETS ETF Sponsored by Table of Contents Executive Summary 1 What

More information

Chapter 15 OPTIONS ON MONEY MARKET FUTURES

Chapter 15 OPTIONS ON MONEY MARKET FUTURES Page 218 The information in this chapter was last updated in 1993. Since the money market evolves very rapidly, recent developments may have superseded some of the content of this chapter. Chapter 15 OPTIONS

More information

Credit Derivatives. Southeastern Actuaries Conference. Fall Meeting. November 18, 2005. Credit Derivatives. What are they? How are they priced?

Credit Derivatives. Southeastern Actuaries Conference. Fall Meeting. November 18, 2005. Credit Derivatives. What are they? How are they priced? 1 Credit Derivatives Southeastern Actuaries Conference Fall Meeting November 18, 2005 Credit Derivatives What are they? How are they priced? Applications in risk management Potential uses 2 2 Credit Derivatives

More information

The Impact of Interest Rate Shocks on the Performance of the Banking Sector

The Impact of Interest Rate Shocks on the Performance of the Banking Sector The Impact of Interest Rate Shocks on the Performance of the Banking Sector by Wensheng Peng, Kitty Lai, Frank Leung and Chang Shu of the Research Department A rise in the Hong Kong dollar risk premium,

More information

Note 8: Derivative Instruments

Note 8: Derivative Instruments Note 8: Derivative Instruments Derivative instruments are financial contracts that derive their value from underlying changes in interest rates, foreign exchange rates or other financial or commodity prices

More information

Interest Rate Options

Interest Rate Options Interest Rate Options A discussion of how investors can help control interest rate exposure and make the most of the interest rate market. The Chicago Board Options Exchange (CBOE) is the world s largest

More information

Learning Curve An introduction to the use of the Bloomberg system in swaps analysis Received: 1st July, 2002

Learning Curve An introduction to the use of the Bloomberg system in swaps analysis Received: 1st July, 2002 Learning Curve An introduction to the use of the Bloomberg system in swaps analysis Received: 1st July, 2002 Aaron Nematnejad works in the fixed income analytics team at Bloomberg L.P. in London. He graduated

More information

8. Eurodollars: Parallel Settlement

8. Eurodollars: Parallel Settlement 8. Eurodollars: Parallel Settlement Eurodollars are dollar balances held by banks or bank branches outside the country, which banks hold no reserves at the Fed and consequently have no direct access to

More information

IMF COMMITTEE ON BALANCE OF PAYMENTS STATISTICS BALANCE OF PAYMENTS TECHNICAL EXPERT GROUP (BOPTEG)

IMF COMMITTEE ON BALANCE OF PAYMENTS STATISTICS BALANCE OF PAYMENTS TECHNICAL EXPERT GROUP (BOPTEG) IMF COMMITTEE ON BALANCE OF PAYMENTS STATISTICS BALANCE OF PAYMENTS TECHNICAL EXPERT GROUP (BOPTEG) BOPTEG ISSUES PAPER # 21A THE NATURE OF LEASE PAYMENTS ON GOLD LOANS Prepared by International and Financial

More information

1 Foreign Exchange Markets and Exchange Rates

1 Foreign Exchange Markets and Exchange Rates 1 Foreign Exchange Markets and Exchange Rates 1.1 Exchange Rates: Quotations 1.2 Nominal and Real Exchange Rates 2 The Law of One Price and Purchasing-Power Parity 2.1 Interest Rates and Exchange Rates:

More information

Introduction To Fixed Income Derivatives

Introduction To Fixed Income Derivatives Introduction To Fixed Income Derivatives Derivative instruments offer numerous benefits to investment managers and the clients they serve. The goal of this paper is to give a high level overview of derivatives

More information

International Finance Prof. A. K. Misra Department of Management Indian Institute of Technology, Kharagpur

International Finance Prof. A. K. Misra Department of Management Indian Institute of Technology, Kharagpur International Finance Prof. A. K. Misra Department of Management Indian Institute of Technology, Kharagpur Lecture - 16 Transaction Exposure Management Good morning. Let us move to the session 16, where

More information

Forward Contracts and Forward Rates

Forward Contracts and Forward Rates Forward Contracts and Forward Rates Outline and Readings Outline Forward Contracts Forward Prices Forward Rates Information in Forward Rates Reading Veronesi, Chapters 5 and 7 Tuckman, Chapters 2 and 16

More information

Treasury Bond Futures

Treasury Bond Futures Treasury Bond Futures Concepts and Buzzwords Basic Futures Contract Futures vs. Forward Delivery Options Reading Veronesi, Chapters 6 and 11 Tuckman, Chapter 14 Underlying asset, marking-to-market, convergence

More information

NOTES ON THE BANK OF ENGLAND UK YIELD CURVES

NOTES ON THE BANK OF ENGLAND UK YIELD CURVES NOTES ON THE BANK OF ENGLAND UK YIELD CURVES The Macro-Financial Analysis Division of the Bank of England estimates yield curves for the United Kingdom on a daily basis. They are of three kinds. One set

More information

Manual for SOA Exam FM/CAS Exam 2.

Manual for SOA Exam FM/CAS Exam 2. Manual for SOA Exam FM/CAS Exam 2. Chapter 7. Derivatives markets. c 2009. Miguel A. Arcones. All rights reserved. Extract from: Arcones Manual for the SOA Exam FM/CAS Exam 2, Financial Mathematics. Fall

More information

ACI Operations Certificate (010) Sample Questions

ACI Operations Certificate (010) Sample Questions ACI Operations Certificate (010) Sample Questions Setting the benchmark in certifying the financial industry globally 8 Rue du Mail, 75002 Paris - France T: +33 1 42975115 - F: +33 1 42975116 - www.aciforex.org

More information

Forwards and Futures

Forwards and Futures Prof. Alex Shapiro Lecture Notes 16 Forwards and Futures I. Readings and Suggested Practice Problems II. Forward Contracts III. Futures Contracts IV. Forward-Spot Parity V. Stock Index Forward-Spot Parity

More information

FINANCIAL MARKETS INTRODUCTION PROGRAMME MODULE 5 FINANCIAL MARKETS

FINANCIAL MARKETS INTRODUCTION PROGRAMME MODULE 5 FINANCIAL MARKETS INTRODUCTION PROGRAMME FINANCIAL MARKETS FINANCIAL MARKETS This module contains a synopsis of different types of financial markets and explains the difference between cash and future markets. The module

More information

Learning Curve Using Bond Futures Contracts for Trading and Hedging Moorad Choudhry

Learning Curve Using Bond Futures Contracts for Trading and Hedging Moorad Choudhry Learning Curve Using Bond Futures Contracts for Trading and Hedging Moorad Choudhry YieldCurve.com 2004 Page 1 A widely used risk management instrument in the debt capital markets is the government bond

More information

CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES

CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES CHAPTER : THE TERM STRUCTURE OF INTEREST RATES CHAPTER : THE TERM STRUCTURE OF INTEREST RATES PROBLEM SETS.. In general, the forward rate can be viewed as the sum of the market s expectation of the future

More information

Currency Futures and Forward Contracts

Currency Futures and Forward Contracts Currency Futures and Forward Contracts by Geneviève Payette presented to Gregor Smith Queen s University January 28, 2005 In the past 30 years exchange rates have become much more volatile and less predictable

More information

Trading in Treasury Bond Futures Contracts and Bonds in Australia

Trading in Treasury Bond Futures Contracts and Bonds in Australia Trading in Treasury Bond Futures Contracts and Bonds in Australia Belinda Cheung* Treasury bond futures are a key financial product in Australia, with turnover in Treasury bond futures contracts significantly

More information

Reference Guide: CBOT Fed Funds Futures

Reference Guide: CBOT Fed Funds Futures Reference Guide: CBOT Fed Funds Futures Interest Rate Products Table of Contents Introduction...........................................................................................................

More information

International Master Economics and Finance

International Master Economics and Finance International Master Economics and Finance Mario Bellia bellia@unive.it Pricing Derivatives using Bloomberg Professional Service 03/2013 IRS Summary FRA Plain vanilla swap Amortizing swap Cap, Floor, Digital

More information

The Case for Senior Loans

The Case for Senior Loans The Case for 1.877.622.5552 www.firsttrust.ca : A Potential Opportunity for Investors With interest rates at historically low levels, these are challenging times to invest for income. At the same time,

More information

Hedging Interest-Rate Risk: A Primer in Instruments. & Accounting. September 29, 2015. Presented by: Ruth Hardie

Hedging Interest-Rate Risk: A Primer in Instruments. & Accounting. September 29, 2015. Presented by: Ruth Hardie Hedging Interest-Rate Risk: A Primer in Instruments September 29, 2015 & Accounting Presented by: Ruth Hardie Hedge Trackers, LLC Integrated Derivative Management Interest Rate, Foreign Currency and Commodities

More information

FIN 684 Fixed-Income Analysis From Repos to Monetary Policy. Funding Positions

FIN 684 Fixed-Income Analysis From Repos to Monetary Policy. Funding Positions FIN 684 Fixed-Income Analysis From Repos to Monetary Policy Professor Robert B.H. Hauswald Kogod School of Business, AU Funding Positions Short-term funding: repos and money markets funding trading positions

More information