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Financial futures

 

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A financial future is a futures contract on a short term interest rate (STIR). Contracts vary, but are often defined on a interest rate index such as 3-month sterling or US dollar LIBOR.

They are traded across a wide range of currencies, including the G12 country currencies and many others.

Some representative financial futures contracts are

United States

  • 90-day Eurodollar *(IMM)
  • 1 mo LIBOR (IMM)
  • Fed Funds 30 day (CBT)

Europe

  • 3 mo Euribor (LIF)
  • 90-day Sterling LIBOR (LIF)
  • Euro Sfr (LIF)

Asia

  • 3 mo Euroyen (TIF)
  • 90-day Bank Bill (SFE)

where

  • IMM is the International Money Market of the Chicago Mercantile Exchange
  • CBT is the Chicago Board of Trade
  • LIF is the London International Financial Futures Exchange
  • TIF is the Tokyo International Financial Futures Exchange
  • SFE is the Sydney Futures Exchange

As an example, consider the definition of the International Money Market (IMM) eurodollar interest rate future, the most widely and deeply traded financial futures contract.

  • There are four contracts per year: March, June, September, December (plus serial months)
  • They are listed on a 10 year cycle. Other markets only extend about 2-4 years.
  • Last Trading Day is the second London business day preceding the third Wednesday of the contract month
  • Delivery Day is cash settlement on the third Wednesday.
  • The minimum fluctuation (tick size) is half a basis point or 0.005%.
  • Payment is the difference between the price paid for the contract (in ticks) multiplied by the "tick value" of the contract which is $12.50 per tick.
  • Before the Last Trading Day the contract trades at market prices. The Final Settlement Price is the British Bankers' Association (BBA) percentage rate for Three–Month Eurodollar Interbank Time Deposits, rounded to the nearest 1/10000th of a percentage point at 11:00 London time on that day, subtracted from 100. (Expressing financial futures prices as 100 minus the implied interest rate was originally intended to make the contract price behave similarly to a Bond (finance) price in that an increase in price corresponds to a decrease in yield).

Financial futures are extensively used in the hedging of interest rate swaps.

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