Financial Future

A financial future is a futures contract on a short term interest rate (STIR). Contracts vary, but are often defined on an interest rate index such as 3-month sterling or US dollar LIBOR.

They are traded across a wide range of currencies, including the G12 country currencies and many others.

Some representative financial futures contracts are:

United States

  • 90-day Eurodollar *(IMM)
  • 1 mo LIBOR (IMM)
  • Fed Funds 30 day (CBOT)

Europe

  • 3 mo Euribor (Euronext.liffe)
  • 90-day Sterling LIBOR (Euronext.liffe)
  • Euro Sfr (Euronext.liffe)

Asia

  • 3 mo Euroyen (TIF)
  • 90-day Bank Bill (SFE)

where

  • IMM is the International Money Market of the Chicago Mercantile Exchange
  • CBOT is the Chicago Board of Trade
  • TOCOM is the Tokyo Commodity Exchange
  • SFE is the Sydney futures exchange

As an example, consider the definition of the International Money Market (IMM) eurodollar interest rate future, the most widely and deeply traded financial futures contract.

  • There are four contracts per year: March, June, September, December (plus serial months)
  • They are listed on a 10 year cycle. Other markets only extend about 2–4 years.
  • Last Trading Day is the second London business day preceding the third Wednesday of the contract month
  • Delivery Day is cash settlement on the third Wednesday.
  • The minimum fluctuation (Commodity tick size) is half a basis point or 0.005%.
  • Payment is the difference between the price paid for the contract (in ticks) multiplied by the "tick value" of the contract which is $12.50 per tick.
  • Before the Last Trading Day the contract trades at market prices. The Final Settlement Price is the British Bankers Association (BBA) percentage rate for Three–Month Eurodollar Interbank Time Deposits, rounded to the nearest 1/10000th of a percentage point at 11:00 London time on that day, subtracted from 100. (Expressing financial futures prices as 100 minus the implied interest rate was originally intended to make the contract price behave similarly to a Bond price in that an increase in price corresponds to a decrease in yield).

Financial futures are extensively used in the hedging of interest rate swaps.

Famous quotes containing the words financial and/or future:

    “A theory of the middle class: that it is not to be determined by its financial situation but rather by its relation to government. That is, one could shade down from an actual ruling or governing class to a class hopelessly out of relation to government, thinking of gov’t as beyond its control, of itself as wholly controlled by gov’t. Somewhere in between and in gradations is the group that has the sense that gov’t exists for it, and shapes its consciousness accordingly.”
    —Lionel Trilling (1905–1975)

    “The ellipse is as aimless as that,
    Stretching invisibly into the future so as to reappear
    In our present. Its flexing is its account,
    Return to the point of no return.”
    —John Ashbery (b. 1927)