An interest rate future is a futures contract with an underlying instrument that pays interest. An interest rate future is a contract between the buyer and seller agreeing to the future delivery of any interest-bearing asset. The interest rate future allows the buyer and seller to lock in the price of the interest-bearing asset for a future date. Other products such as CDs, Treasury notes and Ginnie Mae are also available to trade as underlying assets of an interest rate future.
The most popular interest rate futures are the year, year, five-year and two-year Treasuries, as well as the eurodollar. Interest rate futures are used for hedging purposes and speculation purposes. Treasury-based interest rate futures and eurodollar-based interest rate futures trade differently. These contracts, unlike Treasury-based contracts, also can trade at half-tick and quarter-tick values.
The price of an interest rate futures moves inversely to change in interest rates. If interest rates go down, the price of the interest rate future goes up and vice-versa.
Assume that a trader speculates that in one year interest rate may decrease. The trader purchases a year Treasury bond future for a price of ' One year later, the trader's prediction has come true.
Interest rates are lower, and the interest rate future he holds is now priced at ' The trader sells, and his profit is:. Dictionary Term Of The Day. A conflict of interest inherent in any relationship where one party is expected to Broker Reviews Find the best broker for your trading or investing needs See Reviews.
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Become a day trader. Interest Rate Future Share. What is an 'Interest Rate Future' An interest rate future is a futures contract with an underlying instrument that pays interest. Interest Rate Future Example Treasury-based interest rate futures and eurodollar-based interest rate futures trade differently. The trader sells, and his profit is: Get Free Newsletters Newsletters.More...