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Derivatives Investment

Interest Rate Futures / Bond Futures

Interest Rate Futures/ Bond Futures are contracts where the holder agrees to take delivery of a given amount of the related debt security at a later date. Interest rate futures are stated as a percentage of the par value of the applicable debt security. The value of Interest Rate Futures contracts is directly tied to the interest rate level. For example, as interest rates decrease the value of the contract increases. As the price of or quote for the contract goes up, the purchaser of the contract has a gain, while the seller loses. A change of one basis point in the interest rate level causes the price to change. Those who trade in interest rate futures do not usually take possession of the financial instrument (e.g. in the case of 3M BIBOR Futures, 6M THBFIX Futures and 5Y Government Bond Futures).

Advantages of Interest Rate Futures Trading
  • Speculating and short-selling possibilities
  • If you believe that interest rates will rise, you can make a profit by taking a short position in the Interest Rate Futures market. Conversely, if you believe that interest rates will fall, you can make a profit by taking a long position in the Interest Rate Futures market.

  • Hedging
  • If you own a portfolio of debt securities and believe that interest rates have risen too sharply over the past few weeks, you can benefit from futures trading as a hedging tool. By holding a short position in Interest Rate Futures you can profit from your futures position even if your debt securities portfolio is showing a loss.

Risk of Interest Rate Futures Trading
  • Monitor your portfolio
  • Investment in Interest Rate Futures/ Bond Futures contracts involves money placed as margin only, and the amount invested is far less than the value of underlying assets. If investors make profit, on a mark-to-market basis the margin will increase. Conversely, if investors make a profit on a mark-to-market basis the margin will be reduced. If the margin level is reduced to a maintenance margin, investors will be required (i.e. a call margin) to add margin money until it reaches the level of initial margin. Therefore, investors should monitor their position and margin closely.

  • A limited lifespan
  • Interest Rate Futures/ Bond Futures contracts have a limited lifespan. Investors should take note of the maturity date.

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