Buy/Sell Interest Rate Futures

CFA Level III
#1

Keeping going back and forth on this. This is my train of thought / issue -->

– IF buying a future on a stock or commodity is a long position (i.e. at settlement you believe you will be given someting worth more than what you paid for it in cash earlier);

– AND Increase in interest rates = decrease in price/value of bond;

– SHOULDN’T buying (long) interest rate futures = selling (short) bond futures ?

See Question 12 in Study Session 11. Ibahn thinks that interest rates will go down, so he buys (long) interest rate futures…

#2

I don’t see where Ibahn says he thinks interest rates will fall?

Question 12 asks what he’s likely to do given they want to change the average duration of the portfolio, the only correct answer is B. Buying interest rate futures increases duration.

#3

Question twelve is part of an itemset (11-16). In the answer to 11, it says he is likely forecasting a decrease in interest rates.

#4

Ah, okay I see what you mean.

If i recall correctly this section was littered with poorly worded itemsets, this one smells like one of those.

There’s a lot of subtle implied decision making here. The facts are:

  1. wants to increase exposure to interest rates

  2. wants to adjust the duration to capture exposure to interest rates

In both of these intances, you want to increase your exposure to interest rates by being long interest rate futures to capture falling interest rates, and thus, increasing bond values.

The text does a poor job at distinguishing between interest rate futures and bond futures. Come to the conclusion that interest/bond futures are inversly related to interest rates. Long interest rate futures = long bonds

#5

[quote=“Galli”]

Come to the conclusion that interest/bond futures are inversly related to interest rates.

Does this mean interest rate future and bond futures are (directionaly) the same? What are some differences (if any) between the two…

#6

I think you are thinking of IR options, long ir future is better compared to long bond. Long ir option could be thought as short bond.

#7

Interest rate futures and bond futures are the same thing. It is confusing but it is how it is on the market. When they call ‘interest rate futures’ there are refering to underlyings that are affected by interest rates, a.k.a bonds. I don’t know who came up with this nonsense, but it is how it is.

however when you are referrring to interest rates options, the underlying is the interest rate itself. Go figure

#8

Ah-Hah !!! Thank you very much Unemployed. I am not a bond trader, so this counterintuitive nomenclature was very confusing for me. Makes sense. Will move on now!