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CFTC Approves CME, CBOE Credit Derivatives Contracts,
CFTC Approves CME Credit Derivative Product, Also Approves OCC Clearing of Proposed CBOE Products
also see #msg-20210321
Release: 5345-07
For Release: June 5, 2007
Washington, D.C. – Today, the Commodity Futures Trading Commission announced it is allowing a new credit derivative product to begin trading on the Chicago Mercantile Exchange (CME). Exchange-traded credit derivative products provide liquidity and transparency and allow parties to hedge counterparty credit risk.
The Commission reviewed and approved the CME’s North American Investment Grade High Volatility Credit Index Event contract, which is a contract based on an index or bundle of reference entities. The CME product involves a payout in the event of certain credit events, such as a bankruptcy or failure to pay, experienced by one or more reference entities.
The Options Clearing Corporation (OCC) also recently requested Commission review of its proposal to clear similar products to be traded on the Chicago Board Options Exchange (CBOE). As a result, the Commission today issued an exemptive order to allow the OCC to clear these products.
Approving the trading and clearing of these products provides the marketplace with valuable counterparty credit risk management products, while ensuring that appropriate public, market participant and financial protections are in place.
# # #
and there's a fairly peculiar spike in the USB/TLT ratio...hmm
same with SHY/2yr #msg-18249807
Options Traders Increasingly Signaling Fed Rate Hike
Options Traders Increasingly Signaling Fed Rate Hike
The grizzled soothsayers trading options on Federal Fund futures have assigned greater odds recently to the Fed’s raising short-term interest rates – possibly as soon as December. A month ago, no expectations of the kind existed.
June 2007
In the options market where the savviest investors take apart conventional wisdom, the Federal Reserve is facing growing pressure to consider raising interest rates as soon as December.
Options on Federal Fund futures at the Chicago Board of Trade indicate a 41 percent chance the central bank will lift its target rate for overnight loans between banks to 5.5 percent from the current 5.25 percent, according to data compiled by Bloomberg. A month ago, they showed no expectations for an increase.
While the economy expanded at the slowest pace in more than four years in the first quarter, inflation remains at the top of the Fed's comfort zone, business activity has rebounded, the jobless rate is near the lowest in six years and stock indexes are setting record highs. Just three months ago, options traders speculated the weakest housing market in 16 years would force the central bank to cut interest rates to 4.5 percent by January.
"The economy is in better shape than people give it credit for," said Jamie Jackson, who oversees government debt trading at RiverSource Investments in Minneapolis, which manages $100 billion of bonds. "People exaggerated the pass-through effects of the housing weakness. If the Fed were to do something by year-end it would be a tightening."
The chance of at least one cut in the overnight lending rate between banks has fallen to 29 percent from 83 percent since the start of May, options prices show.
Read more on (Bloomberg)
TNX ~ breaking higher...see #msg-20209907
agreed.
By the way, we have talked on the topic of behavorial finance, both in my intermediate finance class & my stock market & investments class, but not in depth.
I think I'm going to take you up on the offer and make one of these days a read-the-day-away at Barnes and Nobles...
Are quick reads and gets you into the field fairly quickly:
Inefficient Markets: An Introduction to Behavioral Finance
Beyond Greed and Fear: Understanding Behavioral Finance
are also good, but more like textbooks:
Advances in Behavioral Finance
Advances in Behavioral Economics
best to go to a bookstore and take a day to read through them. This stuff is very dry and its more a benefit to the reader to find a writer that reads well than someone who is a statistician, unless you are looking for a text book.
None at all. We have no behavioral economist in our department. Most of our people are ecomotrecians, with a few labor market analysts & two guys who really know their macro/int'l trade.
I've been wanting to read a book on behavioral economics. Do you have any suggestions? A primer? More or less?
have you done much with behavioral economics yet? This is a powerful field and is probably the leading factor in most markets. "Don't worry about figuring out where the herd is going, as much as leading them to where you want to go."
But I am more into number crunching & arbitrage than long term data analysis... More risk more reward. You are young. Might as well do it now before you get settled down with a wife and kids. Then you will see how much more risk they add to your trades. First build capital, Then preserve it.
I just got done with a class called "stabilzation policy", but that's mostly what we talked about.
The first half was all about business cycles, and their interpretations by the monetarists, keynesians (and new keynesians), and real businesss cycle theorists...
We did get into some regression forecasting in the end..but it was elementary stuff.
I lean to the quant size.
But I am more into number crunching & arbitrage than long term data analysis...
Not sure what they are teaching in school these days but business cycles are kind of antiquated. Kind of irrational and unscientific that you can have patterns in the market. Today's economics is coming out more mathematical. I think it's being used more to game the system than to monitor it. Business cycles went out the door when the markets just kept rallying in the late 80s into the 90s. The 87 crash was a skipped year and through everything for a loop.
Investment Outlook
Investment Outlook
Bill Gross | May/June 2007
It’s a Dr. Strangelove world I suppose, or at least that’s PIMCO’s Secular Forum theme describing the likely global economic and investment environment over the next 3-5 years. Not that we want to start you off with the impression that we are as deranged as Peter Sellers or as far gone as Slim Pickens riding that A bomb in our cartoon caricature. It’s just after listening to esteemed speakers such as Larry Summers and Martin Barnes, and analyzing months of internal PIMCO research during our recent three-day session in Newport Beach, that like the dear Doctor, we concluded we should stop worrying so much, or if not, at least try to love “da bomb.” “Da bomb?” We use the term loosely and with the spirit of youth who describe anything that is spectacular and enviable as “da bomb.” For the purpose of this Outlook, “da bomb” is globalization and all of its wondrous benefits – high growth, low inflation, accelerating profits, and benign interest rates. For that matter, you can compile a short list of critical factors that have aided and abetted globalization’s surge during the past decade or so: the information technology revolution, favorable government policies including inflation targeting and lower taxes, a shift to freer low cost markets in China and India, as well as moves towards deregulation and lower trade barriers worldwide. These have been PIMCO secular themes for years now, but somehow after correctly analyzing the evolution of “da bomb” we never stopped worrying about it and how it might end; like Slim Pickens headed for his mushroom cloud destination 20,000 feet below, we were giddy, but subconsciously pretty darn worried. We foresaw rising global growth, but said it would be “moderate” due to a lack of aggregate demand. We spoke to a “stable disequilibrium” which referred to good times now, but maybe bad times on the horizon, and emphasized not the stability but the potential downside arising from trade deficit imbalances, U.S. debt buildup, and resultant financial flows. Those worries were enough to tilt portfolio constructions towards a more U.S. centric housing led slowdown which we hit right on the money, but they steered us away from a more global orientation where the rest of the world continued to experience 5%+ growth rates and to dominate financial market trends.
Big deal or nuance? Well the fear of disequilibrium led to underweightings in risk assets and premature positions in front-end global yield curves over the past several years, and those positions cost us some basis points. So this Secular Forum stuff is quite important after all. Water under the bridge though and this is a new Forum. We put two glasses in front of those 80 or so in attendance in PIMCO’s big room (but clearly visible to the hundreds watching on screens in surrounding locations) and said: “This one’s half-empty, and this one’s half-full. It’s up to us to choose.” We didn’t really vow to stop worrying – just to worry less – and to look at “da bomb” from a different perspective and ask if there was a lotta love there. Let’s see what we found.
Secular Review
Globalization. Technology. Freer markets/financial innovation. Favorable public policy. These are “da bomb’s” critical components and we could spend paragraphs expounding on the influence of each. Take it from us, we spent mucho hours of discussion with Larry Summers taking us through the intricacies of globalization and listening to the Bank Credit Analyst’s Martin Barnes – well he didn’t invent “da bomb” but he knows what goes into one. Let’s say for now though that all of these ingredients have combined to produce the dynamic trends displayed in our four mini-charts below: accelerating global growth; disinflation; increasing returns on equity capital; and low real interest rates.
And let’s be clear about one important thing. As investment managers as opposed to private citizens we don’t give much of a hoot about “da bomb” except as it affects those four little graphs and their trend lines that you see in front of you. Get them right and you’ll have what should be described I suppose as a “quadfecta” and a pot-load of alpha. Get them wrong and well…enjoy that ride Slim Pickens, the end is nigh! Interestingly, each of these trends has a common thread, as do the components of “da bomb”: The ascendance and dominance of capital vs. labor. Add a billion or so potential workers to the global labor force, blend in a technology S curve acceleration, combine these with deregulation, lower taxes, and free trade, and you have a recipe for accelerating returns to capital and diminishing returns to labor. Higher stock prices, lower inflation, declining interest rates and importantly a rather low volatility environment for both economic growth and asset prices have resulted. It’s known as the “great moderation” in economic circles, assisted not insignificantly by what has been called Bretton Woods II, a recirculation of surplus reserves into consuming nations that has promoted growth and lower interest rates – no mean feat in historical context.
What’s New?
Does this virtuous circle favoring capital at the expense of labor continue? We see nothing to stop it absent a global financial bubble popping of sorts, an accelerated decline of U.S. housing in the short run, or a U.S.-led trade policy reversal that could precipitate counter-attacks from Asian exporters. These three are not “black swans” as they say. Asset bubbles are a near inevitable result of attractively financed leverage in search of a limited array of financial assets – and the exuberance that inevitably accompanies them. In turn, if U.S. housing declines soon morph into the consumer sector, the belief in a U.S.-centric global economy will reemerge, and a cyclical argument for slower global growth will accompany it. Anti-trade legislation may or may not become a reality. Still, odds favor a continuation of recent years’ global growth rates and the favorable dynamics for most financial markets which accompany that secular 3-5 year forecast.
A bigger threat to asset markets however, comes not from slower economic growth in the short-term, but inflationary pressures towards the end of our secular timeframe. Note first of all the increasing influence of non-core food and energy prices in G-7 nations over the past few years as illustrated in Chart 5 for the United States. Since 1967, average differences in headline vs. core inflation have essentially been zero, despite distinct periods of cyclical variation. Now, however, with globalization so dominant and Chinese/Asian appetites for oil, soybeans, and iron ore amongst other commodities so voracious, it’s hard to envision an extended period of lower headline U.S. increases. This may bias more central banks to begin considering headline numbers in their policy decisions like Japan and the ECB do already.
There are other global threats to the disinflationary character of “da bomb.” Chart 6 outlines an increasing trend of import prices from mainland China through Hong Kong and then outward. Admittedly, the appreciation of the Yuan has played a part, but that, I suppose, is the point. As the Yuan inexorably revalues, China’s ability to export deflationary impulses to the rest of the world becomes questionable, especially as it itself experiences internal inflation. China may still be exporting deflation to Asia and Euroland, but it clearly is beginning to export mild inflation to Japan and the U.S. And, although China and other BRICs/developing nations will undoubtedly remain mercantilistic exporters for years to come, an internal orientation is developing which at the margin absorbs excess savings, increases aggregate demand, and tilts global inflation upward. Importantly, special consultant to PIMCO Alan Greenspan has pointed out that the process of transitioning hundreds of millions of workers from planned economies to a market environment may peak in the next 2-3 years in terms of its rate of growth, reducing the disinflationary impact. Additionally, common sense would acknowledge that the labor/capital tug of war which has produced noticeable inequalities between wealthy and lower class workers would begin to be rectified globally via wage and benefit gains that in turn will pressure either profit margins, consumer prices, or both. Euroland’s tightening labor market may be this theory’s first petri dish.
All of this will make interesting discussion points at Central Bank policy meetings for years to come. Over 20 CBs (Central Banks) are officially on the “inflation-targeting” bandwagon with the U.S. a de facto member since the appointment of Ben Bernanke. Yet even if the magic 2% inflation target is agreed on by nearly all G-7 policymakers, and a 3-4% target by many developing nations, once-reliable short-term rate targeting levers may not work as effectively. The abundant liquidity of today’s financial marketplace may be another way of describing the ability of private agents – be they hedge funds, private equity, or simply old-fashioned banks – to create credit on their own given satisfactory reserve levels which are now more than ample. Unwillingness to employ increased margin requirements by the Fed during the NASDAQ bubble, and near 0% margin downpayments accepted by mortgage bankers during the housing bubble, give evidence to the diminishing influence of CBs and the growing influence of private agents in the credit creation process. Obviously the ultimate cost of money as determined by CBs is critical in reining in unlimited credit creation, but if the price to Wall Street is far less onerous than the cost to Main Street, there may be limits as to how far CBs can raise rates and therefore control inflation. In sum, “da bomb’s” low inflationary influence will predominate but some G-7 economies may come closer to experiencing 3% inflation as opposed to 2% as we move towards the end of our secular horizon.
Financial Markets
These portents of higher inflation and still strong global growth may seem negative for global bond markets and indeed they are, but cyclical countertrends as evidenced currently in the U.S., Japan, and elsewhere suggest caution in overreaching just yet into bearish secular territory. Additionally, astute investment managers recognize that these days, price/yield insensitive investment flows have been instrumental in “artificially” lowering global G-7 yields by as much as 50 basis points in recent years, although the dampening influence of these same flows on volatility may be a causal agent. What has been called Bretton Woods II is an economist’s label to describe the win/win game of buying surplus nations’ exports and watching those monies come straight back into the buyers’ financial markets in a form of vendor finance – at low yields no less. Following the flows (if you can) has been key in determining G-7 yield trends both short and long-term. Government intermediate and longer curves have been pushed down, and to counter the stimulative effect, short policy rates have been set higher than might otherwise be the case. To illustrate, “10-year real rates” throughout most G-7 curves have been lower in the past few years than they have been over the prior two decades as shown in Chart 7, part of a study done by PIMCO’s Ramin Toloui.
Now, however, a growing number of investors are trying to “be like Yale or Harvard” by moving toward more diversified asset allocations, and that includes the holders of over 50% of outstanding U.S. Treasuries, Chinese and Petrodollar central authorities among them. A day after our Forum’s conclusion, for example, China eased investment restrictions in order to allow its commercial banks to buy stocks abroad. Even without a buyers’ strike or a dramatic reversal of the U.S. current account deficit though, Treasury yields (and other widely held G-7 government issues) will lose some of their caché over the next few years and real yields may rise somewhat. Still there are limits. As our own Paul McCulley suggests, the clearing real rate of interest is not driven so much by the flows of credit, but rather the yield that is necessary to stimulate aggregate demand – that good old glass half-empty influence of recent Secular Forums. We continue to accept the global economy’s structural demand “anemia,” while acknowledging that aggregate consumption and therefore real rates are likely to be boosted as BRIC and other populations adjust to an increased level of affluence by spending more and saving somewhat less at the margin.
As an additional statement of fact, although without firm conclusion, it is striking that real global growth as shown in Chart 8 is advancing at a 5% potential rate while G-7 countries are mired at levels just above 2%. Low policy and term real rates reflective of this 2% growth are in effect financing global growth at 5% – an unprecedented spread for at least the last several decades. Investment managers and economists are fond of speaking of the Yen carry trade – borrow near 0%, invest much higher – as being the dominant liquidity lever in today’s marketplace. Chart 8 speaks to a broader more significant carry trade which admittedly cannot be efficiently employed due to capital controls and relatively immature capital markets (China, India, etc.). Still McCulley’s demand thesis can only stand in awe at the G-7 real yield/global growth rate gap, where G-7 yields in effect stabilize their own economies but serve to encourage attractive arbitrage opportunities into investments in the BRICs and other developing economies. One wonders if there may be some move towards closure in future years, a move that in turn would increase real yields, lower global growth or both.
With the possibility of creeping inflationary tendencies, especially in weak currency countries including the U.S., combined with the potential reduction of financial flow subsidies which to this point have favored fixed income vs. equity and real commodity investments, we come to the following range forecasts for the secular timeframe from 2007 to 2011.
Readers and clients again are alerted to the probability of yields closer to the lower end of our ranges during the weak cyclical environment of 2007 and 2008. The U.S. housing downturn has yet to reach bottom in our opinion and its influence on U.S. consumption and global growth yet to weigh in. Markedly different duration and curve strategies throughout the period therefore may be called for.
As a continuing theme from last year’s forecast, the interest leverage throughout the global financial system will at some point pose a danger to risk-oriented markets (stocks, high yield debt, CDO structures, and housing prices). Yet our strong global growth forecast this year serves as a counterweight to perpetually glass half-empty portfolio structures. The immediate problem with a glass half-full orientation is that almost all risk spreads are already priced for the half-full or even a 7/8-full glass. What PIMCO is now attempting to identify are still appropriately priced “equity like” investments within the asset class choices available to a classic fixed income manager. If the world is going to exhibit near historic growth rates, we want to be able to participate – not only to outperform our indices but to offer attractive absolute returns as well. It will do you as clients, little good, if we outperform the unexciting asset class that G-3 bond markets represent, and yet provide returns of only 3% in doing so. What we want to be able to do is to take advantage of the high growth of emerging market economies – the BRICs and their smaller clones. That obviously can be done via emerging bond markets, yet spreads on their dollar-denominated bonds are narrow (Brazil at 75 basis points over LIBOR). The best opportunities lie with still unexploited local currency fixed income markets (Brazil in this case at 500 basis points over LIBOR) and relatively liquid emerging market currencies which in effect allow bondholders to benefit from growth in these countries via a classically recognized yet not extensively used asset “class” – its currency. We will be in touch with you further regarding our purchase of these assets for your account.
The emphasis on emerging market currencies rather obviously suggests relative weakness of the U.S. dollar. We continue to believe that U.S. growth will descend towards the lower quartile of countries within a broad global composite. Such U.S. growth, despite relatively favorable demographic labor force trends spiked by immigration, will suffer due to reduced U.S. consumption and the need for higher savings. Even in the face of resistance by Chinese authorities vis-à-vis the Yuan and the Japanese via artificially low interest rates, this lower growth speaks to a weaker dollar and lower relative asset price appreciation in comparison to the rest of the world. PIMCO portfolios will therefore likely feature increasing international diversification in foreign currency terms.
We recommend as well that clients and other readers continue to diversify their asset mix with a growing percentage of commodities. In addition, Chart 8’s gap between G-7 financing rates and global economic growth indicates an asset bias towards owners not lenders. PIMCO, while continuing to be recognized as the authority on bonds will hopefully be able to assimilate equity-type returns into new products as well as many standard conventional portfolios.
Conclusions
We started out by suggesting the potential for a Dr. Strangelove world, and our conclusions suggest we may get it. “Da bomb” in the form of sustainable global growth with perhaps an early cyclical slowdown appears to be the likeliest outcome. Those who “own” this growth as opposed to those who lend to it will benefit. We will attempt to position ourselves to exploit this secular change in emerging economies, mindful of our roots as well as the inherent risks in the world of levered finance that is flocking to be like Harvard or Yale during a period of rising valuations. That suggests increasing scrutiny of not only economic growth, but the prices of assets that discount such growth. Hopefully at the end of our secular timeframe in 2012 we will be shouting “Wahoo!” like our boy Slim Pickens. It promises to be quite a ride. And as always, we thank you, our clients, for your trust and the opportunity to express all of the views expressed in this Outlook. If we worry about one thing it’s your satisfaction with our performance. Let it always be thus.
William H. Gross
Managing Director
agreed --- flat yield curve
i usually don't look too far into next rally / tank / but I see the logic behind your plan.
Not gonna comment on it too much cause I don't know a whole lot about what I'm talking about in this respect.
Which is funny because I'm an economics major...
Major disconnect between short(90d) and longterm(5y,10y,30y) rates. There is a huge long view expectation of the Fed making a cut (which I doubt will be soon). But it does revert to yield curve to a flat or normalized slope. In that case the Fed is being given room to raise rates even further in the future. We are expanding into the next economic (4yr) cycle. 2008 should bring a presidential campaign correction and then the rally in the fall into 2009 (in equities).
yields still rising...
90 t-bills are rallying while longer term bonds are being sold off. The yield curve is reverting itself to a more flat or normalized position. Bonds are differing from general sentiment in the media about a slowing economy. Once the yield curve normalizes we should start seeing capital investment pick up again.
TNX ~ 10 year rates showing some bullishness
the bond prices still are on the downtrend...
you are very right ander.
however, i will say the tyx charts bigcharts/stockcharts do look the same.
still...TLT...nah...
Doesn't look like they do.
You have to wonder when everyone is looking at different data all the time how does anyone agree on any particular direction to anything. Logarithmic, arithmetic, with dividends without dividends, moving averages, fibonacci, stoch, rsi, wtf?
cough
that looks better
another idea here...charting the bonds' prices against yields...
shouldn't this illustrate more of a direct relationship???
but if sc adjusts for dividends in tlt, it will too for the bonds, yes?
thanks.
i knew somethin funny is goin on here...
Careful with the correlations and the chart sites. You might just be charting the dividend adjustment to price. I think Bigcharts does not adjust prices for dividends while Stockcharts does.
I.E. Same TLT, same arithmetic charts. Widely different past performance.
ok. let's try it w. shy/2yr...
hmmm..interesting idea here: let's look at tlt correlation...
$USB 30-Year US Treasury Bond Price (EOD) INDX
Stockcharts complete treasury related index/etf listing
SHY 1-3 Year Treasury Bond Fund (Leh) iShares AMEX
TLT 20+ Year Treasury Bond Fund (Leh) iShares AMEX
$UST1M 1-Month US Treasury Yield INDX
$UST1Y 1-Year US Treasury Yield INDX
$TNX 10 Year Treasury Note Yield INDX
$UST 10-Year US Treasury Note Price (EOD) INDX
$UST10Y 10-Year US Treasury Yield INDX
$USTU 2-Year US Treasury Note Price (EOD) INDX
$UST2Y 2-Year US Treasury Yield INDX
$UST20Y 20-Year US Treasury Yield INDX
$IRX 3-Month T-Bill Discount Rate INDX
$UST3M 3-Month US Treasury Yield INDX
$UST3Y 3-Year US Treasury Yield INDX
$TYX 30-Year T-Bond Yield INDX
$USB 30-Year US Treasury Bond Price (EOD) INDX
$UST30Y 30-Year US Treasury Yield INDX
$FVX 5 Year Treasury Note Yield INDX
$USFV 5-Year US Treasury Note Price (EOD) INDX
$UST5Y 5-Year US Treasury Yield INDX
$UST6M 6-Month US Treasury Yield INDX
Charts:
CME Interest Rate Product Chart Listing
includes:
Top Volume:
Eurodollar
Euroyen
Libor 1 Month
Swap Rate 10 yr (E)
Swap Rate 2 yr
Swap Rate 5 yr (E)
US 13 Week T-Bill
A-Z Listings:
Consumer Price Index
Eurodollar 5-Year E-mini Bundle
E-mini Eurodollar
Eurodollar
Eurodollar (E)
Euroyen
Euroyen (E)
Euroyen Libor
Eurozone HICP
Libor 1 Month
Libor 1 Month (E)
Mexican 28 Day TIIE
Mexican 91 Day Cetes
Swap Rate 10 yr (E)
Swap Rate 2 yr
Swap Rate 5 yr (E)
US 13 Week T-Bill
Trading Eurodollars
Trading Eurodollars ~ Traders Log article
Money Market: Introduction
The Money Market ~ Investopedia Article
ot - Good stuff here sean. Best of luck to you in FL. Seems liek a good start to something. I'm in.
ot: I am leaving for Florida in a few hours. Super excited. Not going to watch the markets all week!
The cash is sitting in a MMMF. Earning my sweet 5% per annum.
Sometime it's best to take time off. I say this, and I'm young
ot: = Off Topic = anything not directly tied to the market.
Until we vote against it... ot: posts are accepted but need to be labeled ot:
CME: Interest Rate Futures Contract Listing:
Eurodollar
Eurodollar 5-Year E-mini Bundle
LIBOR
Swap Futures
13-Week T-bills
Euroyen
Japanse Government Bonds
Credit Index Event Contracts
Eurozone Harmonized Index of Consumer Prices
CME Eurodollar Options on Futures:
q10 By what time must you notify the Clearing House that you wish to exercise an option?
a10 You must notify your clearing firm, and your clearing firm must notify the Clearing House, by 7:00 p.m. The Clearing House can be contacted at 312-207-2525.
q11 By how much does an option have to be in-the-money for automatic exercise to take place at expiration?
a11 Automatic expiration takes place only at expiration and not before. To be automatically exercised at expiration, an option needs only to be in-the-money by the smallest price increment possible (e.g., a quarter tick).
At expiration, all in-the-money Eurodollar options are exercised automatically, in the absence of contrary instructions delivered to the Clearing House.
q12 If you're short an in-the-money option, when will you know you have been assigned? When will you be assigned a futures position?
a12 You will be informed before the markets open on the following business day that you have been assigned, and you’ll be assigned a futures position as of the day the assignment was made. Assignments are made through a process of random selection of clearing firms with open short positions in the specific option.
q13 What is the dollar value of "cabinet" in the Eurodollar options?
a13 Cabinet in Eurodollar options is the minimum premium value of $6.25 or "¼ tick."
q14 What are the rules regarding the listing of 12.5 point strike prices?
a14 Quarterly and Serial options: On the expiration day of options in the March quarterly cycle, strike prices in 12.5-point increments will be listed on the two serial, and next March quarterly option expirations.
For example, on Monday, September 13, 1999 (expiration day for Sep 99 futures and options), 12.5-point strike prices would be listed on October and November serial options, and December quarterly options.
One-year Mid-Curve options ("shorts"): the first quarterly and two serial expirations are eligible to trade in 12.5-point strike price increments at any given time.
q15 Where can I find the performance bond updates and information on the SPAN® system?
a15 The navigation bar on the left has links to both performance bond rates and information about SPAN.
CME Eurdollar FAQ:
q1: When is the last trading day for Eurodollar?
a1: Eurodollar futures cease trading at 5:00 a.m. Chicago Time (11:00 a.m. London Time) on the second London bank business day immediately preceding the third Wednesday of the contract month; final settlement price is based on the British Bankers’ Association Interest Settlement Rate.
q2: When are new contracts listed?
a2: Following the expiration of a quarterly Eurodollar futures contract, a fortieth quarterly contract is available to trade the following business day. Since the vast majority of Eurodollar futures contracts expire on a Monday, the new contract is generally available on the Tuesday following a Monday expiration day.
The lag between expiration of the near month future and the listing of the fortieth Eurodollar contract results in a one-day delay in listing a new "Copper" (Year 10) pack after the expiration of the front quarterly future.
q3: How is the implied forward rate calculated?
a3: Eurodollar futures reflect market expectations of forward 3-month rates. An implied forward rate indicates approximately where short-term rates may be expected to be sometime in the future.
The following formula provides a guideline for calculating a 3-month rate, three months forward:
1 + 6mth spot rate x 182/360 = (1 + 3mth spot rate x 91/360) (1 + 3mth fwd rate x 91/360)
For example: 3-month LIBOR spot rate = 5.4400%
6-month LIBOR spot rate = 5.8763%
3-month forward rate = R
1 + .058763 x 182/360 = (1 +.0544 x 91/360)(1 + R x 91/360)
1.029708 = (1.013751)(1 + R x 91/360)
1.015740 = (1 + R x 91/360)
0.062270 or 6.227% = R = the implied forward rate
q4: What is the difference between "add-on interest" and "discount yield?"
a4: This concept describes the difference in the yields quoted for T-bill and Eurodollar contracts. T-bills are sold at a discount to face value and redeemed at par. The difference between par value and the T-bill’s price is the interest paid. Interest on ED deposits is "added on" to the principal loan amount.
An example of add-on interest with Eurodollars: You borrow $1 million for three months at 5.50%. The 5.50% of interest is "added on" to the $1 million principal amount. The interest due (assuming a 91-day loan) is equal to $1 million x .055 x 91/360 = $13,903.
An example of discount yield with T-bills: You sell $1 million face value of 91-day T-bills at an annual discount yield of 5.50%.
Discount = $1 million x 0.055 x 91/360 = $13,903
T-bill Price = $1 million -$13,903 = $986,097
Money Market Yield = $13,903/$986,097 x 360/91 = 5.578% (comparable to ED "add-on" rate)
q5: Where does the Eurodollar $25 "whole" tick come from?
a5: The Eurodollar tick reflects the dollar value of a 1/100 of one percent change in a $1 million, 90-day deposit. It is determined by this equation:
$1,000,000 notional x .0001 x 90/360 = $25
q6: What is the minimum price fluctuation (tick)?
a6: Trading can occur in .0025 increments ($6.25/contract) or "¼ tick" in the expiring front-month contract; in .005 increments ($12.50/contract) or "½ tick" in the four serial, and all forty quarterly expirations.
back to top | back to Eurodollar Futures
q7 When does the "new" expiring front-month contract begin trading in "¼ ticks?"
a7 The "new" expiring front-month contract begins trading in ¼ ticks when GLOBEX opens at 5:00 PM, Chicago time on the Sunday before the Monday on which the "old" expiring contract ceases trading.
q8 How are price assignments determined for packs and bundles?
a8 The price of a bundle or pack is quoted in terms of the average net change from the previous day’s settlement prices for the entire group of contracts in the pack or bundle.
Bundles and packs are quoted in minimum .25 tick increments; however, whole-basis-point prices are assigned to the individual legs of the trade. Prices are assigned to reflect fractional combination prices beginning with the most deferred contracts, and working forward.
For example:
* If the 2-year bundle trades at + 2.25, the first six contracts are priced at a net change of +2, and the last two contracts at +3.
* If the 10-year bundle trades at - 5.75, the first ten contracts are priced at a net change of -5, and the last 30 contracts at -6.
* If the Purple Pack trades at +.5, the first two contracts are priced at steady (unchanged), and the second two contracts are priced at +1.
q9 How is the "lead" month in Eurodollars determined?
a9 The "lead" month is considered to be the contract with the highest daily volume, currently based on a 12-day moving average, calculated on every business day, beginning five weeks after the previous contract expiration.
CME Eurodollar Futures (2):
A benchmark for investors globally, CME Eurodollar futures provide a valuable, cost-effective tool for hedging interest rate fluctuations on Eurodollars, which are U.S. dollars deposited in commercial banks outside the United States. Together, CME Eurodollar futures and options on futures lead the industry with open interest over 40 million and average daily volume of 3.0 million.
Plus, with over 85% of CME Eurodollar futures trading electronically on the CME Globex platform, portfolio managers can hedge short term interest rate risk with a variety of trading strategies, like Butterflies, Packs and Bundles, around the clock from around the world.
Benefits of trading CME Eurodollar futures:
Flexibility - CME continues to develop new, innovative products that provide even more flexibility for CME Eurodollar futures and options including: CME Eurodollar 5-Year E-mini Bundles, CME Eurodollar Bundles, CME Eurodollar Packs, Serial CME Eurodollars, Weekly Mid-Curve Options, and CME Subs
Concentrated Liquidity - Consistently tight bid/ask spreads and lower transaction costs for our clients
Price Transparency - Open, fair and anonymous trading environment with market prices universally available in real-time
Variety of Trading opportunities - Including outright long or short positions, spreading against other instruments, hedging and arbitrage strategies
Ease of Trading - Electronic trading on CME Globex provides reduced connectivity costs, increased accessibility, and fast, efficient trading
CME also offers CME Clearing360™, a clearing solution for over-the-counter (OTC) market participants. CME Clearing360 is an extension of existing CME Clearing services, and offers customers the flexibility of OTC transactions with the risk management efficiencies of centralized clearing.
As part of the CME Clearing360 initiative, CME offers Substitutions, or “Subs”, which allow market participants to streamline the transaction process, consolidate OTC and futures positions for administration and clearing, and work with a single counterparty - CME Clearing. To learn more about CME Subs and our new Subs pricing program, visit http://www.cme.com/subs.
CME Eurodollar Futures:
CME Eurodollar Futures
Eurodollar Futures Contract
At the same time, eurodollar refers to the financial futures contract based upon these deposits. Traded at the Chicago Mercantile Exchange (CME) in Chicago, each CME Eurodollar futures contract has a notional or 'face value' of $1,000,000, though the leverage used in futures allows one to trade a contract for just hundreds of dollars. Trade in Eurodollar futures is extensive, thus offering uniquely deep liquidity. A purchase or sale is, in effect, a bet on U.S. short-term interest rates. Prices are quite responsive to Fed policy, inflation, and other economic indicators.
CME Eurodollar futures prices are determined by the market’s forecast of the 3-month London Inter Bank Offered Rate (LIBOR). The futures prices are derived by subtracting that implied interest rate (yield) from 100.00. For instance, an anticipated interest rate of 5.00 percent will translate to a futures price of 95.00 (100.00 – 5.00 = 95.00). Given this price construction, if interest rates rise, the price of the futures contract falls, and vice versa. This retains the expected relationship between the price of an interest rate based contract and the yield of the same contract
If you believe that interest rates will fall, you would then buy a CME Eurodollar futures contract (and vice versa; if you believe rates will rise, you would sell a CME Eurodollar futures contract).
Prices of CME Eurodollar futures trade in increments of one-quarter and one-half of one basis point, depending upon when the contract expires, and this is often referred to as the “tick” value. Gains or losses are calculated simply by determining the number of ticks moved, multiplied by the value of the tick.
A full tick or basis point in CME Eurodollar futures, for example, is worth $25.00. The $25.00 basis point value is based on the $1,000,000 notional value of this contract, as calculated below:
$1,000,000 notional value x .0001 (one basis point) x 90/360 (three month) deposit period = $25.00
For the nearest expiring or “spot” month in CME Eurodollar futures (serial or quarterly), the minimum price fluctuation is 1⁄4 of a basis point or a “1⁄4 tick,” which is $6.25. For all other CME Eurodollar contracts, the minimum price fluctuation is 1⁄2 of one basis point, or a “1⁄2 tick,” which is $12.50.
The CME Eurodollar futures contract is used to hedge interest rate swaps. There is an arbitrage relationship between the interest rate swap market, the Forward Rate Agreement market and the Eurodollar contract. CME Eurodollar futures can be traded by implementing a spread strategy among multiple contracts to take advantage of movements in the forward curve for future pricing of interest rates.
The front month contracts are among the most liquid futures contracts in the world. The contract suite has quarterly expirations out to 10 years. Each year has a reference color, with the first year from today being referred to as 'front' months.
source: Wikipedia: Eurodollar
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