The company holds bonds and Consultant C suggests selling interest rate futures. The answer says this is a good position to take if you are not sure which way interest rates will move.
So I assume the position is taken on the bond?
If rates go up, bond values go down so he gains on his short position, which hedges his long bond position.
If rates go down. bond values go up so he loses out on gains on his long bond position.
I guess my only question is if it is implied that the position is taken on the bond and also, is it possible to have an interest rate futures position on either the bond or the rate? For example, a put can be taken on a bond position or on an interest rate.
no youre correct. i wanted to confirm that when we say “interest rate future” in this Q it is implied that your position is on the bond, and not the rate.
but in general interest rate future can be either on the bond or the rate, can’t it?
dont agree that in this case it is on the movement of the rate. the answer says that the futures position wins when rates go up. he is short interest rate futures. this means he wants bond values (prices) to go down. for bond valus to go down, rates have to go up. so the only way the answer is correct and that he hedges his long bond position is if the short position is taken on the bond, not the rate.
so back to the original question…if we agree that the interest futures position is on the bond here, do we also agree that the position can be taken on either the bond or the interest rate (just like in a put), and they would have to specify which one the analyst is doing?
right, and that is what is happening in this question. but are your sure the underlying cannot in some instances be the rate? for example, a put can be written on a bond or an interest rate.
This also confused the shit outta me. When they say they are long the rate, i think rate goes up, they make money. I really think it needs to be explicitly stated what the underlying is, because there are definitely credit products out there that are literally bets on the rate with the rate as underlying.
I think this is the only case in the curriculum where it is unclear though, credit spread forwards and options are long the actual rate.
I don’t know if this is what you meant to say before but I found in CFAI Volume 4 Page 115: "Interest rate futures contracts are traded on short-term instruments (for example, treasury bills and eurodollars) and longer term instruments (for example, Treasury notes and bonds).