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FUTURES : Major Forward and Futures contracts
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Stock Index Futures.

These are futures where the underlying is a stock index. They are frequently used to hedge portfolios of stocks.

Examples: futures on S&P500, NASDAQ indexes,...

Forward Rate Agreement (FRA).

A Forward Rate Agreement (FRA) is a forward contract in which the parties agrees that a fixed interest rate will apply to a certain principal during a fixed period of time that will start a a future date.

Treasury Bond and Treasury Note Futures.

These are futures where the underlying is a Treasury Bond or a Treasury Note. These contracts are very popular and are used to hedge long term interest rates.

Treasury Bill Futures.

Here the underlying is a 90-day Treasury bill. Treasury Bill futures are used to hedge short term interest rates.

EURODOLLAR Futures.

This is the most successful of the short term interest futures contracts traded on the Chicago Mercantile Exchange. The underlying asset is the rate paid on dollars deposited by one bank with another bank (also known as LIBOR for London Interbank Offered Rate). EURODOLLAR futures are also used to hedge short term interest rates.

The main difference with the Treasury Bill futures contract is that  the underlying rate of EURODOLLAR futures contract is a commercial lending rate and the one of the Treasury Bill futures contract is that rate at which the governments borrow. For treasury bill, the contract price converges at maturity to the price of the underlying treasury bill and if the contract is held until maturity, the Treasury bill is delivered. The EURODOLLAR futures contract is settle in cash and the price is 100 minus short the underlying interest rate.

Treasury bill futures contract is a futures contract on the price of a treasury bill while the EURODOLLAR futures contract is a futures contract on an interest rate.

SWAPS.

Swaps are private agreement (forward contract) to exchange cash flows in the future. The two most common swaps are:

Interest rate swaps.

Here the two parties agree to exchange interest on a notional amount for a number of years. One will pay to the other a fixed interest rate during the whole life of the contract and the other will pay a floating rate (LIBOR 3 months) re fixed at predefined dates.

Currency swaps.

Here the two parties agree to exchange a fixed rate on a notional loan in a currency against a fixed rate on a notional loan in another currency (that represents more or less the same amount.

The SWAPS market is an Over The Counter Market. New instruments are invented every day and therefore describing them all is impossible.

 


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