There exist two types of future contracts:
- Short-term contracts which permit the enterprises to cover themselves against
short-term interest rate risks; - Long-term contracts permitting the enterprises to cover themselves against long-
term risks.
Contract price reflects the anticipation of buyer and sellers regarding the interest rates. In
order to properly understand the functioning of forward operations, it is desirable to look
at the inverse relation between the prices of fixed-rate securities and the rates of interest.
The terms used in published information on futures contracts are: opening price of a
session, settlement price or closing rate, change, highest rate, lowest rate, volume traded.
- Basic Characteristics of Rate Futures.
Basis. The basis, in the context of the futures market, represents the difference between
the forward rate and spot rate (i.e., spot rate on settlement date). The basis may be
positive or negative during the contract period. However, on the maturity date, there is a
convergence of the basis because forward rate on that date becomes same as the spot rate.
If the duration of a deposit or a loan is not equal to the duration of the futures contract,
the enterprise or the bank exposes itself to a basis risk.
Maturity date. These are four in number: March, June, September and December.
Guarantee deposits. Guarantee deposits are made with the clearing house of the
exchange. The role of the clearing house is to ensure the solvability of operators. The
guarantees are of the order of 2 to 4 per cent of the contract amount.
Everyday, during the life of the contract, gains or losses are calculated according to the
rate movements. If the rate moves unfavorable for the operator, he is called upon to
make supplementary payments (called margins). Conversely, he receives payment if the
rates have moved in his favor. This process continues up to the date of the delivery,
provided the contract is not already liquidated before that date.
- Direct Costs of Operations.
The direct costs of these operations are represented by the commissions paid to brokers
and are normally paid when positions are closed or delivery is made.
- Covering risk in the market of interest rate futures
When a futures contract is brought or sold, the price is fixed but payment is made at a
future date. The margin is paid either in cash or in the form of treasury bills to