S&P Forward Interest Rate Arbitrage Indices Methodology

Transcription

1 S&P Forward Interest Rate Arbitrage Indices Methodology S&P Dow Jones Indices: Index Methodology

2 Table of Contents Introduction 3 Highlights 3 Index Family 3 Index Construction 5 Approaches 5 Calculation of the Forward Interest Rate Arbitrage Index Excess Return (ER) 5 Contract Rebalancing 6 Calculation of the G10 Forward Interest Rate Arbitrage Index Excess Return (ER) 6 Calculation of the Forward Interest Rate Arbitrage Index Total Return (TR) 7 Base Dates 9 Index Governance 10 Index Committee 10 Index Policy 11 Announcements 11 Holiday Schedule 11 Unscheduled Market Closures 11 Delisting of Futures Contracts 11 Index Dissemination 12 Tickers 12 S&P Contact Information 13 Index Management 13 Media Relations 13 Product Management 13 Index Operations & Business Development 13 Standard & Poor s: S&P Forward Interest Rate Arbitrage Indices Methodology 1

3 Disclaimer 14 Standard & Poor s: S&P Forward Interest Rate Arbitrage Indices Methodology 2

4 Introduction The S&P Forward Interest Rate Arbitrage Indices are designed to model the outcome of a forward interest rate arbitrage strategy that seeks to profit from the commonly observed tendency for forward interest rates to be overstated by the spot yield curve. The indices seek to model the outcome of holding a long position in three-month interest rate futures contracts with one year remaining to maturity. In most interest rate markets, long-term interest rates tend to be higher than short term-interest rates (a normal yield curve). Since a long-term rate can be replicated by holding and rolling over a series of short-term rates, this implies that forward short term rates are generally priced at higher yields than equivalent spot short term rates. As short-term rates have an equal chance of increasing or decreasing over time, future short term rates are, on average, overpriced in the market. Thus, it may be profitable to invest in forward starting short term deposits and unwind as the deposit comes closer to maturity. Highlights The S&P Forward Interest Rate Arbitrage Indices measure the return from a long position in the three-month interest rate futures contract maturing 12 months after the end of the current quarterly cycle. The indices roll on a quarterly basis in March, June, September and December, based on the settlement schedule of three-month interest rate futures contracts. A total return version of each index is calculated, which includes interest accrual on the notional value of the index based on the three-month interbank bid rate and reinvestment into the index. Index Family The S&P Forward Interest Rate Arbitrage indices consist of indices representing each of the G10 currencies for which a liquid futures contract exists on an applicable three-month interest rate as well as a composite index comprised of equal positions in each of the single currency indices. The S&P Forward Interest Rate Arbitrage indices currently include the S&P Australian Dollar Forward Rate Arbitrage Index, the S&P British Pound Forward Rate Arbitrage Index, the S&P Canadian Dollar Forward Rate Arbitrage Index, the S&P Euro Forward Rate Arbitrage Index, the S&P Japanese Yen Forward Rate Arbitrage Index, the S&P Swiss Franc Forward Rate Arbitrage Index, S&P U.S. Dollar Forward Rate Arbitrage Index and the S&P G10 Forward Rate Arbitrage Index. Standard & Poor s: S&P Forward Interest Rate Arbitrage Indices Methodology 3

5 The S&P Forward Interest Rate Arbitrage indices are part of the S&P Arbitrage Index Family. This family also includes the S&P 500 Volatility Arbitrage, the S&P Currency Arbitrage, and the S&P Long Only Merger Arbitrage Indices. Standard & Poor s: S&P Forward Interest Rate Arbitrage Indices Methodology 4

6 Index Construction Approaches Interest rate futures contracts are futures contracts with an interest bearing instrument as the underlying asset. Interest rate futures allow for the hedging of interest rate risks as well as for speculation based on a perceived level of future interest rates. A particular futures contract represents the expected level of the underlying interest rate at the maturity of the futures contract in question. For example, a 12*15 interest rate futures contact (the fifth quarterly contract) represents the three-month interest rate in twelve months time. The S&P Forward Interest Rate Arbitrage Indices model the return from a long futures position in the 12* 15 interest rate futures contract that is rolled on a quarterly basis at the expiration of the current near-term futures contract. The total return version of the index incorporates interest accrual on the notional value of the index. Interest accrues based on the local three-month interbank bid rate. Each index is calculated after the official closing price of each of the relevant futures contracts is available. Thus, indices within the index family may be calculated at different times. Trading hours for each of the contracts are specified below. The calculation of the S&P G10 Forward Rate Arbitrage Index is discussed in a separate section below. Calculation of the Forward Interest Rate Arbitrage Index Excess Return (ER) On any business day, t, the index ER is calculated as follows: where: IndexER = IndexER 1+ t ( CDR ) t 1 t (1) IndexER t-1 = The Excess Return Index level on the preceding business day, defined as any date on which the index is calculated. CDR t = Contract Daily Return, as determined by the following formula: where: DCRPt CDR t = 1 (2) DCRP t 1 t-1 = the preceding business day. Standard & Poor s: S&P Forward Interest Rate Arbitrage Indices Methodology 5

7 DCRP t = Daily Contract Reference Price of the 12*15 futures contract. The official close, as designated by the relevant exchange, is used. The following contracts are used for each of the indices: Contract Index Reference Level Trading Venue Trading Hours S&P Australian Dollar Forward Rate Arbitrage Index Australian Bank Bill 3 Month Rate Sydney Futures Exchange 08:28 16:30 Sydney time S&P British Pound Forward Rate Arbitrage Index S&P Canadian Dollar Forward Rate Arbitrage Index S&P Euro Forward Rate Arbitrage Index S&P Japanese Yen Forward Rate Arbitrage Index S&P Swiss Franc Forward Rate Arbitrage Index S&P U.S. Dollar Forward Rate Arbitrage Index 3 Month Sterling Rate 3 Month Canadian Dollar Bank Acceptance Rate 3 Month Euribor Rate 3 Month Euroyen Rate 3 Month Euroswiss Rate 3 Month Eurodollar Rate London International Financial Futures and Options Exchange 7:30 18:00 London time Montreal Exchange 06:00 16:00 Montreal time London International Financial Futures and Options Exchange Tokyo Financial Exchange London International Financial Futures and Options Exchange Chicago Mercantile Exchange 01:10 21:00 London time 08:45 20:00 Tokyo time 7:30 18:00 London time 17:00 16:00 Chicago time The S&P G10 Forward Rate Arbitrage Index contains all of the contracts listed above. Contract Rebalancing The index rolls on a quarterly basis each March, June, September and December, in conjunction with the settlement schedule of the underlying contracts. On each contract roll date the old 12*15 contract is sold and the new 12*15 contract is purchased. For example, at the March roll the March contract of the following year is sold and the June contract of the following year is purchased. Calculation of the G10 Forward Interest Rate Arbitrage Index Excess Return (ER) The S&P G10 Forward Rate Arbitrage Index consists of equal weighted positions in each of the single currency forward arbitrage indices (currently seven indices). The index rebalances to equal weights on a quarterly basis in conjunction with the roll schedule of the 3 Month Eurodollar Rate contract. On any business day, t, the index ER is calculated as follows: IndexER t = IndexER rb n i= 1 ( 1/ n * ER i, t / ERi, rb * FX i, t / FX i, rb ) Standard & Poor s: S&P Forward Interest Rate Arbitrage Indices Methodology 6

8 where: IndexER rb = The Excess Return Index level on the preceding quarterly rebalancing day. n = The number of constituent indices in the index. ER i, t = The Excess Return Index level of Index i on the current business day, t. ER i, rb = The Excess Return Index level of Index i on the preceding quarterly rebalancing day. FX i, t = The exchange rate between U.S. Dollars and the currency associated with Index i on the current business day, t. FX i, rb = The exchange rate between U.S. Dollars and the currency associated with Index i on the preceding quarterly rebalancing day. Calculation of the Forward Interest Rate Arbitrage Index Total Return (TR) A total return version of each of the indices is calculated, which includes interest accrual on the notional value of the index based on the local three-month interbank bid rate, as follows: where: t ( + CDR IR ) IndexTR = IndexTR 1 + t 1 t t (3) IndexTR t-1 = The Total Return Index level on the preceding business day. CDR t = Contract Daily Return as defined in equation (2). IR t = Interest return, as determined by the following formula: days IRt = Rt 1 * (4) daycount days = the number of calendar days since the immediately preceding business day. daycount = the day count convention of the interest rate in question, generally 360 or 365. R t-1 = the local interbank bid rate as on the immediately preceding business day or, for the S&P G10 Forward Rate Arbitrage Index, the interbank bid rate Standard & Poor s: S&P Forward Interest Rate Arbitrage Indices Methodology 7

9 for the currency that the index is calculated in, with different rates used for each of the different currency versions of the index Standard & Poor s: S&P Forward Interest Rate Arbitrage Indices Methodology 8

10 The following interest rates are used for each of the indices: Index Interest Rate Day Count Convention S&P Australian Dollar 90 Day Australian Bank Bill Rate Actual/365 Forward Rate Arbitrage Index (Bloomberg Ticker BBSW3M) S&P British Pound Forward 3 Month GBP London Interbank Bid Rate Actual/365 Rate Arbitrage Index S&P Canadian Dollar Forward Rate Arbitrage Index S&P Euro Forward Rate Arbitrage Index S&P Japanese Yen Forward Rate Arbitrage Index S&P Swiss Franc Forward Rate Arbitrage Index S&P U.S. Dollar Forward Rate Arbitrage Index S&P G10 Forward Rate Arbitrage Index (USD) S&P G10 Forward Rate Arbitrage Index (EUR) S&P G10 Forward Rate Arbitrage Index (GBP) Base Dates (Bloomberg ticker LBID03M) 3 Month Canadian Banker s Acceptance Rate (Bloomberg ticker CDOR03) 3 Month EUR London Interbank Bid Rate (Bloomberg ticker LIEBB03M) 3 Month Tokyo Interbank Domestic Yen Offered Rate (Bloomberg Ticker TI0003M) 3 Month CHF London Interbank Bid Rate (Bloomberg ticker LISF03M) 3 Month USD London Interbank Bid Rate (Bloomberg ticker LIBMB03M) 3 Month USD London Interbank Bid Rate (Bloomberg ticker LIBMB03M) 3 Month EUR London Interbank Bid Rate (Bloomberg ticker LIEBB03M) 3 Month GBP London Interbank Bid Rate (Bloomberg ticker LBID03M) The base dates of the S&P Forward Interest Rate Bias indices are as follows: Actual/365 Actual/360 Actual/365 Actual/360 Actual/360 Actual/360 Actual/360 Actual/365 Index Base Date Base Value S&P Australian Dollar Forward Rate Arbitrage Index 1/2/ S&P British Pound Forward Rate Arbitrage Index 1/2/ S&P Canadian Dollar Forward Rate Arbitrage Index 12/16/ S&P Euro Forward Rate Arbitrage Index 1/4/ S&P Japanese Yen Forward Rate Arbitrage Index 11/17/ S&P Swiss Franc Forward Rate Arbitrage Index 6/18/ S&P U.S. Dollar Forward Rate Arbitrage Index 1/2/ S&P G10 Forward Rate Arbitrage Index (USD) 1/4/ S&P G10 Forward Rate Arbitrage Index (EUR) 1/4/ S&P G10 Forward Rate Arbitrage Index (GBP) 1/4/ Standard & Poor s: S&P Forward Interest Rate Arbitrage Indices Methodology 9

11 Index Governance Index Committee The S&P Commodities Index Committee maintains the S&P Forward Interest Rate Arbitrage Indices. The Index Committee meets on an as-needed basis. At each meeting, the Index Committee reviews any significant market events. In addition, the Index Committee may revise index policy for timing of rebalancings or other matters. Standard & Poor s considers information about changes to its indices and related matters to be potentially market moving and material. Therefore, all Index Committee discussions are confidential. Standard & Poor s: S&P Forward Interest Rate Arbitrage Indices Methodology 10

12 Index Policy Announcements Announcements of the daily index values are made after the market close each day. Holiday Schedule Each index is calculated daily when the relevant exchange (Chicago Mercantile Exchange, London International Financial Futures and Options Exchange, Montreal Exchange, Sydney Futures Exchange, and Tokyo Financial Exchange) is open, excluding holidays and weekends. The S&P G10 Forward Rate Arbitrage Index is calculated daily when any of the relevant exchanges is open. Unscheduled Market Closures In situations where an exchange is forced to close early due to unforeseen events, such as computer or electric power failures, weather conditions or other events, Standard & Poor s will calculate the value of the index based on the most recent prior closing futures price published by the exchange, and the roll for that day will be carried to the next business day as described in the Contract Rebalancing section. If the exchange fails to open due to unforeseen circumstances, Standard & Poor s may determine not to publish the index for that day. Delisting of Futures Contracts If one or more futures contracts included in one of the indices are no longer listed, Standard & Poor s may choose to cease publication of the effected index at that time. Standard & Poor s: S&P Forward Interest Rate Arbitrage Indices Methodology 11

13 Index Dissemination Historical index returns are available through Standard & Poor s index data group for subscription via FTP. Tickers Excess Return Indices S&P Australian Dollar Forward Rate Arbitrage Index S&P British Pound Forward Rate Arbitrage Index S&P Canadian Dollar Forward Rate Arbitrage Index S&P Euro Forward Rate Arbitrage Index S&P Japanese Yen Forward Rate Arbitrage Index S&P Swiss Franc Forward Rate Arbitrage Index S&P U.S. Dollar Forward Rate Arbitrage Index S&P G10 Forward Rate Arbitrage Index (USD) S&P G10 Forward Rate Arbitrage Index (EUR) S&P G10 Forward Rate Arbitrage Index (GBP) Total Return Indices S&P Australian Dollar Forward Rate Arbitrage Index S&P British Pound Forward Rate Arbitrage Index S&P Canadian Dollar Forward Rate Arbitrage Index S&P Euro Forward Rate Arbitrage Index S&P Japanese Yen Forward Rate Arbitrage Index S&P Swiss Franc Forward Rate Arbitrage Index S&P U.S. Dollar Forward Rate Arbitrage Index S&P G10 Forward Rate Arbitrage Index (USD) S&P G10 Forward Rate Arbitrage Index (EUR) S&P G10 Forward Rate Arbitrage Index (GBP) Bloomberg SPFBADP SPFBGBP SPFBCDP SPFBEUP SPFBJYP SPFBSFP SPFBUSP SPFBUSCP SPFBEUCP SPFBGBCP SPFBADTR SPFBGBTR SPFBCDTR SPFBEUTR SPFBJYTR SPFBSFTR SPFBUSTR SPFBUSCT SPFBEUCT SPFBGBCT Standard & Poor s: S&P Forward Interest Rate Arbitrage Indices Methodology 12

14 S&P Contact Information Index Management David M. Blitzer, Ph.D. Managing Director & Chairman of the Index Committee Mark Berkenkopf - Team Leader Commodity Indices mark_berkenkopf@standardandpoors.com Media Relations David Guarino Communications dave_guarino@standardandpoors.com Product Management Steven Goldin Vice President, Strategy Indices steven_goldin@standardandpoors.com Index Operations & Business Development North America New York Client Services index_services@sandp.com Toronto Jasmit Bhandal Europe London Susan Fagg Asia Tokyo Seiichiro Uchi Beijing Andrew Webb Sydney Guy Maguire Standard & Poor s: S&P Forward Interest Rate Arbitrage Indices Methodology 13

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