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Economic Glossary

    Interest Rate Future

It is aparticular kind of the future rate derivatives or more precisly financial derivatiives with an interset bearing instrument as underlying assets.
A futures contract with an underlying instrument that pays interest.Price and yield will always be in an inversely correlated relationship. So these derivatives are used as to reduce the risk of future loss. 
Futures contract by which lenders and borrowers commit themselves to the interest rates at which they will lend or borrow specified sums on a specified future date. Firms that may suffer losses due to fluctuations in interest rates (such as banks, brokerage houses, insurance companies) use these contracts to hedge (reduce risk). Speculators use these contracts to bet on lower or higher market interest rates in the future. These contract are traded on financial futures and options exchanges, and their value rises and falls in an inverse proportion to the rise and fall in market interest rates.

An interest rate future is a contract between the buyer and seller agreeing to the future delivery of any interest-bearing asset. The interest rate future allows the buyer and seller to lock in the price of the interest-bearing asset for a future date.

Interest rate futures can be based on underlying instruments such as:

  • Treasury Bills in the case of Treasury Bill Futures traded on the CME
  • Treasury Bonds in the case of Treasury Bond Futures traded on the CBT
  • Other products such as CDs, Treasury Notes and Ginnie Mae's are also available to trade as underlying assets in an interest rate future

Because interest rate futures contracts are large in size (i.e. $1 million for Treasury Bills), they are not a product for the less sophisticated trader


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Word of the day

Abnegation(n)

Meaning:

The act or an instance of abnegating, or denying oneself some rights, conveniences.

Synonyms: abandonment, abstinence, eschewal, forbearance, giving up

Antonyms: acquiescence, admittance, surrenders, yielding

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