thanks Joey the only one I don´t get is the first one. When I said interest rates futures, I was thinking about FRAs. Shouldn´t those increase when interest rates go up? I mean, a long “interest rate future” is negatively related to interest rates (as a simple bond)? thx
But an FRA is decidedly not an interest rate futures contract cuz: a) An FRA is an OTC transaction and a futures contract is done on an exchange b) An FRA has convexity and an interest rate future doesn’t c) An FRA is not marked-to-market and a futures contract is (which is a big deal here because the MTM account balance is earning interest highly correlated with the futures contract underlier)
understood, thanks again I think the way we have been studying this from level I and II is confusing us. At least in my case, I always thought that interest rates futures moved up and down in the same direction as the underlying rate (instead of the opposite way), and that “interest rate futurs” had nothing to do with “futures on bonds”… Perhaps because the curriculum (in level I and II) is always focused on FRA calculations and cap/floors for lending purposes and nothing else, or perhaps because I just didn´t take more time to read other stuff, too. anyway, thanks for your help again, really appreciated
I agree with that - the futures exchanges essentially made the interest rate contracts like that because first there was T-Bill and they wanted to make Eurodollar look like T-Bill but they couldn’t make a deliverable Eurodollar loan so they thought up this 1 - interest rate thing. The rest is history.
“An Interest Rate Future is a futures contract with an interest-bearing instrument as the underlying asset”, so IR future has positive duration Interest option on the other hand has negative duration
comp_sci_kid Wrote: ------------------------------------------------------- > “An Interest Rate Future is a futures contract > with an interest-bearing instrument as the > underlying asset”, so IR future has positive > duration > Except that’s not true (does the book say that?). All interest-bearing instruments that might underlie futures contracts have convexity and the contracts don’t. There is nothing underlying these contracts except a reference rate. > Interest option on the other hand has negative > duration Depends on the option.
soooo. what is the conclusion on int rate futures & interest rate options for duration?
JoeyDVivre Wrote: ------------------------------------------------------- > comp_sci_kid Wrote: > -------------------------------------------------- > ----- > > “An Interest Rate Future is a futures contract > > with an interest-bearing instrument as the > > underlying asset”, so IR future has positive > > duration > > > Except that’s not true (does the book say that?). > All interest-bearing instruments that might > underlie futures contracts have convexity and the > contracts don’t. There is nothing underlying > these contracts except a reference rate. > Ok, point well taken, you should change wikipedia page as this is copy/paste from ti > > Interest option on the other hand has negative > > duration > > Depends on the option. agreed on that
comp_sci_kid Wrote: ------------------------------------------------------- > JoeyDVivre Wrote: > -------------------------------------------------- > ----- > > comp_sci_kid Wrote: > > > -------------------------------------------------- > > > ----- > > > “An Interest Rate Future is a futures > contract > > > with an interest-bearing instrument as the > > > underlying asset”, so IR future has positive > > > duration > > > > > Except that’s not true (does the book say > that?). > > All interest-bearing instruments that might > > underlie futures contracts have convexity and > the > > contracts don’t. There is nothing underlying > > these contracts except a reference rate. > > > > Ok, point well taken, you should change wikipedia > page as this is copy/paste from ti How do you do that? > > > > Interest option on the other hand has > negative > > > duration > > > > Depends on the option. > > agreed on that