Download - Ch06 DS 6thEd
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Options, Futures, and Other Derivatives6thEdition, Copyright John C. Hull 2005 6.1
Interest Rate Futures
Chapter 6
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Options, Futures, and Other Derivatives6thEdition, Copyright John C. Hull 2005 6.2
Day Count Conventions
in the U.S. (Page 129)
No. of days between dates
------------------------------------------
No. of days in reference period
Treasury Bonds:
X Interest earned inreference period
Actual/Actual (in period)
Corporate and Municipal Bonds: 30/360
Money Market Instruments: Actual/360
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Options, Futures, and Other Derivatives6thEdition, Copyright John C. Hull 2005 6.3
Treasury Bond Price Quotes
in the U.S
Cash price = Quoted price +Accrued Interest
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Options, Futures, and Other Derivatives6thEdition, Copyright John C. Hull 2005 6.4
Treasury Bond Futures
Pages 133-137
Cash price received by party with shortposition =
Most Recent Settlement Price Conversion factor + Accrued interest
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Options, Futures, and Other Derivatives6thEdition, Copyright John C. Hull 2005 6.5
Example
Settlement price of bond delivered = 90.00
Conversion factor = 1.3800
Accrued interest on bond =3.00 Price received for bond is
1.38009.00)+3.00 = $127.20
per $100 of principal
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Options, Futures, and Other Derivatives6thEdition, Copyright John C. Hull 2005 6.6
Conversion Factor
The conversion factor for a bond isapproximately equal to the value of the
bond on the assumption that the yieldcurve is flat at 6% with semiannualcompounding
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Options, Futures, and Other Derivatives6thEdition, Copyright John C. Hull 2005 6.7
CBOT
T-Bonds & T-Notes
Factors that affect the futures price:
Delivery can be made any time
during the delivery monthAny of a range of eligible bonds
can be delivered
The wild card play
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Options, Futures, and Other Derivatives6thEdition, Copyright John C. Hull 2005 6.8
A Eurodollar is a dollar deposited in a bankoutside the United States
Eurodollar futures are futures on the 3-month
Eurodollar deposit rate (same as 3-monthLIBOR rate)
One contract is on the rate earned on $1 million
A change of one basis point or 0.01 in aEurodollar futures quote corresponds to acontract price change of $25
Eurodollar Futures (Page 137-142)
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Options, Futures, and Other Derivatives6thEdition, Copyright John C. Hull 2005 6.9
Eurodollar Futures continued
A Eurodollar futures contract is settled incash
When it expires (on the third Wednesdayof the delivery month) the final settlementprice is 100 minus the actual three monthdeposit rate
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Options, Futures, and Other Derivatives6th
Edition, Copyright John C. Hull 2005 6.11
Example
Date Quote
Nov 1 97.12
Nov 2 97.23
Nov 3 96.98
.
Dec 21 97.42
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Options, Futures, and Other Derivatives6th
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Example continued
If on Nov. 1 you know that you will have$1 million to invest on for three months onDec 21, the contract locks in a rate of100 - 97.12 = 2.88%
In the example you earn 100 97.42 =2.58% on $1 million for three months(=$6,450) and make a gain day by day onthe futures contract of 30$25 =$750
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Options, Futures, and Other Derivatives6th
Edition, Copyright John C. Hull 2005 6.13
Formula for Contract Value (page 138)
If Qis the quoted price of a Eurodollarfutures contract, the value of one contractis 10,000[100-0.25(100-Q)]
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Options, Futures, and Other Derivatives6th
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Forward Rates and Eurodollar
Futures (Page 139-142)
Eurodollar futures contracts last as long as10 years
For Eurodollar futures lasting beyond twoyears we cannot assume that the forwardrate equals the futures rate
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Options, Futures, and Other Derivatives6th
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There are Two Reasons
Futures is settled daily where forward issettled once
Futures is settled at the beginning of theunderlying three-month period; forward issettled at the end of the underlying three-month period
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Options, Futures, and Other Derivatives6th
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Convexity Adjustment when
=0.012 (Table 6.3, page 141)
Maturity ofFutures
ConvexityAdjustment (bps)
2 3.24 12.2
6 27.0
8 47.5
10 73.8
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Options, Futures, and Other Derivatives6th
Edition, Copyright John C. Hull 2005 6.20
Duration Matching
This involves hedging against interestrate risk by matching the durations of
assets and liabilities It provides protection against small
parallel shifts in the zero curve
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Options, Futures, and Other Derivatives6th
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Limitations of Duration-Based
Hedging
Assumes that only parallel shift in yieldcurve take place
Assumes that yield curve changes aresmall
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GAP Management (Business Snapshot 6.3)
This is a more sophisticated approachused by banks to hedge interest rate. Itinvolves
Bucketing the zero curve
Hedging exposure to situation where rates
corresponding to one bucket change andall other rates stay the same.