Aninterest rate future is afutures contract (afinancial derivative) with an interest-bearing instrument as the underlying asset.[1] It is a particular type ofinterest rate derivative. Examples include Treasury-bill futures, Treasury-bond futures andEurodollar futures.
As of 2019[update], the global market for exchange-traded interest rate futures was notionally valued by theBank for International Settlements at $34,771 billion.[2]
Interest rate futures are used tohedge against the risk that interest rates will move in an adverse direction, causing a cost to the company.
For example, borrowers face the risk of interest rates rising. Futures use the inverse relationship between interest rates and bond prices to hedge against the risk of rising interest rates. A borrower will enter to sell a future today. Then if interest rates rise in the future, the value of the future will fall (as it is linked to the underlying asset, bond prices), and hence a profit can be made when closing out of the future (i.e. buying the future).
Treasury futures are contracts sold on the Globex market for March, June, September and December contracts. As pressure to raise interest rates rises, futures contracts will reflect that speculation as a decline in price. Price and yield will always be in an inversely correlated relationship.
Interest rate futures are not directly correlated with the market interest rates. When one enters into an interest rate futures contract (like a bond future), the trader has ability to eventually take delivery of the underlying asset. In the case of notes and bonds this means the trader could potentially take delivery of a bunch of bonds if the contract is not cash settled. The bonds which the seller can deliver vary depending on the futures contract. The seller can choose to deliver a variety of bonds to the buyer that fit the definitions laid out in the contract. The futures contract price takes this into account, therefore prices have less to do with current market interest rates, and more to do with what existing bonds in the market are cheapest to deliver to the buyer.[3]
Ashort-term interest rate (STIR) future is afutures contract that derives its value from theinterest rate at maturation. Common short-term interest rate futures areEurodollar,Euribor,Euroyen, Short Sterling and Euroswiss, which are calculated onLIBOR at settlement, with the exception ofEuribor which is based onEuribor and Euroyen which is based onTIBOR. This value is calculated as 100 minus the interest rate. Contracts vary, but are often defined upon an interest rate index such as 3-month sterling or US dollarLIBOR.
They are traded across a wide range of currencies, including theG12 country currencies and many others.
Some representative contracts are:
| Region | Contract | Exchange | Notes |
|---|---|---|---|
| United States | 90-day Eurodollar | CME | Terminated in June 2023 → converted to3-Month SOFR futures |
| United States | SOFR 1-month & 3-month futures | CME | Active |
| United States | Federal funds 30-day | CBOT | Active |
| Europe | 3-month Euribor | Euronext.liffe | Active |
| Europe | 90-day Sterling LIBOR | Euronext.liffe | Active |
| Europe | Euro Sfr | Euronext.liffe | Active |
| Asia-Pacific | 3-month Euroyen | TIF | Terminated in 2024 → replaced byTONA futures |
| Asia-Pacific | 90-day Bank Bill | SFE | Active |
| Asia-Pacific | BIBOR 3-month (BB3) | TFEX | Active |
where
As an example, consider the definition of theChicago Mercantile ExchangeEurodollar interest rate future, the most widely and deeply traded financial futures contract.
Short-term interest rate futures are extensively used in thehedging ofinterest rate swaps.
A great deal of the trading on these contracts is exchange traded multi-leg strategies, essentially bets upon the future shape of theyield curve and/orbasis. BothLiffe andCME allow direct exchange trading in calendar spreads (the order book for spreads is separate from that of the underlying futures), which are quoted in terms of implied prices (price differences between futures of different expiries). Exchange-traded futures spreads greatly reduce execution risk and slippage, allowing traders to place guaranteed limit orders for entire spreads, otherwise impossible when entering into spreads via two separate futures orders.
