PowerPoint Presentation
IC301
Derivative Securities
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IC301 – Topic 6 & 7
STIRs and T Bond Futures
Interest Rate Futures
Short-term interest rate futures (STIR)
STIR = 100 – 3 month interest rate
e.g. 100 – 2.00
price of futures contract = 98.00
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These are 3 month Eurodollar quotes – what are the implied interest rates for 3 month $ deposits?
Eurodollars, short sterling, Euribor, EuroYen etc. [$usd, £gbp, euros, yen]
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Eurodollar futures contract table (screenshot dated Aug 2019)
Calculate P + L on STIR futures p.162
In the Eurodollar contract, this would be equivalent to $25 – how?
If you bought 100 contracts of EDZ9 (Dec ‘19) at 98.21 and sold them at 98.50, how much would you make?
What has happened to interest rates?
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29*25=725*100=$72,500
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Eurodollar Futures (Page 162-167)
A Eurodollar is a dollar deposited in a bank outside the United States
Eurodollar futures are futures on the 3-month Eurodollar deposit rate (same as 3-month LIBOR rate)
One contract is on the rate earned on $1 million
A change of one basis point or 0.01 in a Eurodollar futures quote corresponds to a contract price change of $25.
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Eurodollar Futures continued
A Eurodollar futures contract is settled in cash
When it expires (on the third Wednesday of the delivery month) the final settlement price is 100 minus the actual three-month Eurodollar deposit rate (Ice Libor).
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Example
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Date Quote
Nov 1 97.12
Nov 2 97.23
Nov 3 96.98
……. ……
Dec 21 97.42
Suppose you buy (take a long position in) 1 contract on November 1
The contract expires on December 21
The prices are as shown
How much do you gain or lose:
a) On Nov 2?
b) On Nov 3?
c) Over the whole time until expiration?
d) What was the Libor rate on expiry?
97.23-97.12 = 0.11 = 11 bps 11*1*25 = $275
96.98-97.12 = -0.14 = -14 bps -14*1*25= -$350 (note Nov 3 loss is actually -$625)
97.42-97.12 = 30bps 30*1*25= $750
Expiry is 97.42, worked out from 2.58% 3-month Libor
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Eurodollar STIRs today (6 Nov 20)
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US Interest Rates (6 Nov 20)
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Bonus question (seminar 6 on STIRs)
If you bought 100 contracts of EDZ0 in 20th Aug’19 and sold them 6th Nov’20, how much would you make or lose?
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Answer to bonus question
99.765-98.69 = 1.075
= 107.5 basis points
107.5*25*100=$268,750 profit
N.B. remember the P+L calculation formula is basis points * bp value of a contract * number of contracts
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