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VALUATION OF FUTURE CONTRACTS - Coggle Diagram
VALUATION OF FUTURE CONTRACTS
Future price
Future price positively correlated with interest rates = Future price :arrow_right: Forward price
_Long future positions:
Cash in when interest rate :arrow_up: = gain more
Cash out when interest rate (opportunity cost) :arrow_down: = less loss
(
Daily settlement or daily cash in/out
)
Future price negatively correlated with interest rates = vice versa
Future price zero correlated with interest rates (interest = constant) = Future price = Forward price
Long futures = Pay MRR --> Gain if MRR :arrow_down:
Short futures = Receive MRR --> Gain if MRR :arrow_up:
That means:
Long futures = Short FRA
Short futures = Long FRA
because:
Long FRA = Pay fixed rate --> Gain if interest rate :arrow_up:
Short FRA = Pay MRR rate --> Loss if interest rate :arrow_up:
FRA gain if MRR :arrow_down:
FRA loss if MRR :arrow_up:
Interest rate futures
Contract value: the underlying of interest rate futures is a deposit contract worth
Futures contract basis point value (BVP): the value of 1bps change in MRR