Interest Rate Futures Trading Defined and Explained

A Futures contracts’ underlying security is a debt obligation. Interest rate futures are defined as a percentage of the value of the applicable debt. The value of interest rate futures contracts is tied to interest rates. A change of one basis point in interest rates causes a corresponding price change. Those who trade in interest rate futures do not usually take possession of the actual financial product.

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Interest Rates Futures Trading

The Chicago Board of Trade deals with the U.S. T-Note and T-Bond futures. T-notes and bonds are known for their liquidity and it is fairly easy for traders to enter and exit positions quickly. Treasury Bond and Note Futures are often used as hedging instruments in an attempt to protect a portfolio’s value as well as lock in a future purchase price.

Interest Rate Futures Trading Strategy

The Chicago Mercantile Exchange trades interest rate futures to manage interest rate risks up to ten years into the future. The CME market mainly comprises the short-term, heavily traded credit products which mature in less than one year.

The Chicago Board of Trade offers CBOT Treasury futures, which are interest rate futures on the longer end of the yield curve. Each CBOT Treasury futures contract establishes government-backed specifications for the financial instruments a trade can deliver.

Interest Rate Futures Trading Software

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    Interest Rate Futures Trading History

    The Chicago Board of Trade first introduced its GNMA contract in 1975. The CBOT interest rate futures and options are the most actively traded type of futures contract worldwide. The underlying governmental debt instruments make this a safely backed trade, although traders can still lose money depending on the position they take in a trade buy.

    The products include; certificates of deposit, federal funds, U.S. Treasury bills, bankers’ acceptances, Euro currency deposits, and commercial paper. Capital-market instruments include medium-term notes, state and municipal bonds, mortgage-backed securities, and U.S. Treasury bonds and notes. Prices of interest rate futures rise and fall in inverse relationship to changes in interest rates.

    Commonly Interest Rate & Bond Futures

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