250 CHAPTER 6. THE MARKET FOR CURRENCY FUTURES
Figure 6.3:Interest-rate Futures as reported by the Financial Times
06/06/06 Open Sett Change High Low Est.Vol Open int
Euribor 3m* Jun 96.97 96.96 -0.01 96.98 96.96 98.491 553.392
Euribor 3m* Sep 96.69 96.69 -1.01 96.70 96.68107.380 582.722
Euribor 3m* Dec 96.49 96.48 -0.02 96.50 96.47110.900 608.862
Euribor 3m* Mar 96.39 96.37 -0.03 96.40 96.36 95.601 487.298
Euribor 3m*... Jun 96.30 96.29 -0.03 96.32 96.28 86.201 414.737...
Euroswiss 3m*... Jun 98.48 98.47 -0.01 98.48 98.46 8.045 75.781...
Sterling 3m*... Jun 95.27 95.26 -0.02 95.27 95.26 15,291 416,929...
Eurodollar 3m... # Jun 94.68 94.67 -0.01 94.69 94.66117,0261297,150...
FedFnds 30d... + Jun 94.970 94.965 -0.005 94.970 94.965 1,078 107,907...
Euroyen 3m... ± Jun 99.655 99.650 -0.020 99.665 99.650 15.364 586.998...
Contracts are based on volumes traded in 2004 Sources: * LIFFE # CME + CBOT ± TIFFEand base the marking to market onone-fourthof the change in the quote.
Before we explain the marking-to-market rule, let us first consider the quotation
rule given in Equation [6.23]. This quote decreases when the forward interest rate
increases—just as a true forward price on a T-bill—and the long side of the contract
is still defined as the one that wins when the quote goes up, the normal convention
in futures or forward markets. However, one major advantage of this price-quoting
convention is that a trader or investor can make instant decisions on the basis of
available forward interest quotes, without any additional computations.
Example 6.17
Let thep.a. forward interest rate be 4.1 percentp.a. for a three-month deposit
starting atT 1. The true forward price would have been computed as
Vt,Tf 1 ,T 2 =1
1 + (1/4) 0. 041
= 98. 985 , 300 ≈ 98 , 99. (6.24)
In contrast, the eurodollar forward quote can be found immediately as 100 percent
- 4.1 percent = 95,9 percent.
The second advantage of the “100 minus interest” way of quoting is that such
quotes are, automatically, multiples of one basis point because interest rates are
multiples of one basis point. With a standard contract size ofusd1m, one tick
(equal to 1/100 of a percent) in the interest rate leads to a tick of 1m×0.0001 =
usd100 dollars in the underlying quote (no odd amounts here). Note that, since
marking to market is based on one-fourth of the change in the quote, a one-tick
change in the interest rate leads to ausd25 change in the required margin.
To understand why marking to market is based on one-fourth of the change of the
quote, go back to the correct forward price, Equation [6.19]. The idea is to undo the
fact that the change in the quote (Equation [6.23]) is about four times the change in
the correct forward price (Equation [6.19]). To understand this, note thatT 2 −T 1