Interest rate futures

CFA Level III
#1

Quesiton guys…

So Interest rate futures contract are negatively correlated with the hcange in interest rates.

When rates rise, the price of deliverable bonds will drop and the futures price will decline.

-When rates drop, the price of the deliverable bonds will rise and the futures price will increase.

So… if you have no opinion aobut interest rate outlook, but would like to avoid risk, why would selling interest rates futures be a good strategy? If rates were to increase, the loss in value of bonds would be offset by the gains from the futures…

I hate the term selling, because it makes it seem like its an opiton… so ill say short interest rate futures. Since you are shorting and not buying the futures contract… dont you lose money if rates rise?

#2

Your loss in the underlying is offset by the gain in the short. You’re indifferent to a rise or a fall in interest rates so you, in effect, remove your bet from the table.

#3

i think you are confusing interest rate futures with bond futures.

Bond futures are negatively correlated to the underlying interest rate.

Interest rate futures are positvely correlated to the underlying interest rate.

From the longs perspective:

For bonds futures think “long the underlying bond”.

For interest rate furtures think “long the underlying rate”

#4

ok… yeah, im getting confused as hell rightn ow… even on thingsl ike… is it a call option on the price or rates?

The text from the original message was from the Fixed Income PM section…

#5

For interest rate call options think:

“right to call the underlying rate”

  • this benefits when rates go up becuase you “call the rate”

For bond cal options think:

“right to call the underlying bond”.

  • here you benefit when rates go down becuase that means the bond price goes up and you “call the bond”.
#6

haha yah i remember this question, #3 right?

I think you may be confusing IR futures with caplets. Dwheats, i think you are confusing the way the syllabus uses IR futures (A very viable conclusion is i am confused) but here me out. IR futures for this chapter are inversely related to reates, just like bond futures. So in this particular question the manager is concerned with rates going up and having a detrimental impact on the portfolio value.

If you have no opinion about IR outlook but want to avoid risk you want to protect against the downside while possibly giving up upside potential. Selling IR futures will do this for the following reasons:

a. If rates increase your portfolio is screwed right. The ir future on the other hand is inversely related to rates so since you are essentially short (you sold) you will benefit and offset the losses with future gains

b. rates decline, you pop champagne and toaste to the good life, with respect to your portfolio. The futures on the other hand are performing well and since you sold you are royally f’d. You tie the nuse around your neck until some young gun cfa candidate informs you that net net you are even. You still kick the chair bc your wife saw the text from your mistress but thats another story,

#7

I think the reason why you are confused is because there are sections in the kaplan material where they say interest rate futures but really mean bond futures

Pretty sure CFAI is guilty of doing the same thing as well