Type or paste question here How do you trade interest rate futures and why?

Type or paste question here

How do you trade interest rate futures and why?

Expert Solution

Interest rate futures are futures contracts based on interest rates, which can be used to either speculate on future interest rates or to hedge against the movement of interest rates.

Generally, the price of the futures contract is primarily determined by the spot price of the underlying asset with slight modifications (like the cost of carry, which in the case of interest rate futures, is the opportunity cost of holding the security instead of cash until the delivery date minus the interest earned from holding the security).

How to trade interest rate futures - Treasury bond futures are traded on exchanges (like the Chicago Board of Trade), which typically requires the delivery of Treasury bonds with more than 15 years remaining to maturity and that is not callable within those 15 years. The short position has a choice of any Treasury bond futures that satisfies the exchange's requirements for the delivered asset.

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How do you trade interest rate futures and why?

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