Introduction to the Interest Rate Complex
Presented by Pete Mulmat
May 22, 2014
Disclaimer
Futures trading is not suitable for all investors, and involves the risk of loss. Futures are a leveraged investment, and because only a
percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money deposited for a futures
position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles. And only a portion of
those funds should be devoted to any one trade because they cannot expect to profit on every trade. All references to options refer to
options on futures.
Swaps trading is not suitable for all investors, involves the risk of loss and should only be undertaken by investors who are ECPs
within the meaning of section 1(a)12 of the Commodity Exchange Act. Swaps are a leveraged investment, and because only a
percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money deposited for a swaps
position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles. And only a portion of
those funds should be devoted to any one trade because they cannot expect to profit on every trade.
Any research views expressed are those of the individual author and do not necessarily represent the views of the CME Group or its
affiliates.
CME Group is a trademark of CME Group Inc. The Globe Logo, CME, Globex and Chicago Mercantile Exchange are trademarks of
Chicago Mercantile Exchange Inc. CBOT and the Chicago Board of Trade are trademarks of the Board of Trade of the City of
Chicago, Inc. NYMEX, New York Mercantile Exchange and ClearPort are registered trademarks of New York Mercantile Exchange,
Inc. COMEX is a trademark of Commodity Exchange, Inc.All other trademarks are the property of their respective owners.
The information within this presentation has been compiled by CME Group for general purposes only. CME Group assumes no
responsibility for any errors or omissions. Additionally, all examples in this presentation are hypothetical situations, used for
explanation purposes only, and should not be considered investment advice or the results of actual market experience.
All matters pertaining to rules and specifications herein are made subject to and are superseded by official Exchange rules. Current
rules should be consulted in all cases concerning contract specifications.
Copyright © 2014 CME Group. All rights reserved.
© 2014 CME Group. All rights reserved.
2
Agenda
• Fed Funds / Eurodollar Futures
• US Treasury Futures
• Resources
• Glossary of Terms
© 2014 CME Group. All rights reserved.
3
Hedging and Speculating
We bring those who want to manage risk together with those who
want to profit from accepting that risk.
© 2014 CME Group. All rights reserved.
4
U.S. Financial Markets
“the relation between the interest rate and the
time to maturity of the debt…” - Wikipedia
Normal Yield Curve
7.00
• A “normal” yield curve is usually
upward sloping with rates rising
over time. This reflects investor
expectations of economic growth
and possible inflationary pressure.
6.00
5.00
4.00
3.00
2.00
1.00
0.00
3-mo
6-mo
1-yr
2-yr
Yield
5-yr
10-yr
30-yr
Maturity
© 2014 CME Group. All rights reserved.
5
U.S. Financial Markets
“the relation between the interest rate and the
time to maturity of the debt…” - Wikipedia
Inverted Yield Curve
7.00
• An inverted, or downward sloping
yield curve occurs when short-term
yields (rates) exceed long term
yields. This was the case in the
early 1980’s when the Fed raised
short-term rates to battle high
inflation
6.00
5.00
4.00
3.00
2.00
1.00
3-mo
6-mo
1-yr
2-yr
3-mo
6-mo
1-yr
2-yr
5-yr
10-yr
Maturity
5-yr
10-yr
© 2014 CME Group. All rights reserved.
30-yr
30-yr
6
CME Group Interest Rate Products
5%
Classic T-Bond
15-25 Yrs
Eurodollars 0-10 Years
5-Yr
T-Note
3%
3-Yr
T-Note
2%
2-Yr
T-Note
1%
Ultra
Bond
25-30
Yrs
10-Yr
T-Note
4%
30-Day Fed
Funds
30-Yr
Swap
10-Yr
Swap
5-Yr
Swap
Blanketing the Yield Curve
2-Yr
Swap
CME Group interest rate products
include Eurodollars, Treasury,
Swap & Fed Fund based products
30-Yr
10-Yr
7-Yr
5-Yr
3-Yr
2-Yr
1-Yr
6-Mth
3-Mth
0%
© 2014 CME Group. All rights reserved.
7
CME Group STIRs
Short Term Interest Rate Products
Fed Fund Futures
• Monthly contract based on 30-day average Fed Funds Rate
• Contracts extend out 36 consecutive months
Eurodollar Futures
• Quarterly and serial contracts based on 3-month LIBOR rate
• Quarterly contracts extend out 10 years
Options are available on these contracts
© 2014 CME Group. All rights reserved.
8
What is an IMM quote?
• Developed by IMM Division of
CME in early 1980’s converts a
yield to a price
• Price moves inversely to yield,
rates go up-price goes down
• Designed to allow financial
instruments that traditionally
traded in yield to trade as a price,
more like commodities
© 2014 CME Group. All rights reserved.
9
Fed Fund Futures
30-Day Fed Fund Futures Contract Specifications
Unit
$5 million notional value
Cash Settlement
Cash settled to average daily Fed Funds overnight (O/N)
as reported by Federal Reserve Bank of New York
Quote
In terms of "IMM index" or 100 less yield,
e.g., yield of 0.35% quoted as 99.65
Tick Size
Nearby month quoted to ¼ basis point (0.0025) = $10.4175
rounded up to nearest cent; all other contract months
quoted to ½ basis point (0.005) = $20.835
Months
First 36 consecutive contract months
Hours of Trade
Floor trading 7:20am CT -2:00pm CT Monday-Friday.
CME Globex® trading platform Mondays - Thursdays from 5:30pm CT
- 4:00pm CT Sunday - Friday
Final Trading Day
Last business day of delivery month when trading closes at 4:00 pm
© 2014 CME Group. All rights reserved.
10
About Fed Fund Futures
• Prices quoted as 100 – Yield, e.g.,
quote of 99.64 implies yield of
0.36% (= 100.00 – 99.64)
• One basis point (0.01%) equates to
$41.67
• Minimum tick-size: One-half of one
basis point (0.005), or $20.835 per
contract.
30-Day Fed Fund Futures
January 30, 2014
Month
Settlement
Yield
Volume
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
Mar-15
99.9275
99.9200
99.9100
99.9100
99.9100
99.9050
99.9050
99.9000
99.8900
99.8800
99.8700
99.8600
99.8450
99.8200
99.8000
353
2,855
3,587
519
372
781
958
447
257
266
478
1,281
1,100
738
426
Dec-16
98.3250
0.0725%
0.0800%
0.0900%
0.0900%
0.0900%
0.0950%
0.0950%
0.1000%
0.1100%
0.1200%
0.1300%
0.1400%
0.1550%
0.1800%
0.2000%
…
1.675%
Open
Interest
39,438
43,634
30,271
17,804
14,188
14,678
17,038
16,396
10,618
9,967
6,929
12,757
10,896
8,291
8,510
-
-
16,069
298,209
© 2014 CME Group. All rights reserved.
11
Fed Monetary Policy
Targeted Fed Funds Rate
Rates
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
9/5/2013
5/15/2013
1/30/2013
9/13/2012
4/25/2012
12/13/2011
8/9/2011
3/15/2011
11/3/2010
6/23/2010
2/18/2010
11/4/2009
6/24/2009
1/28/2009
10/8/2008
6/25/2008
1/30/2008
9/18/2007
5/9/2007
12/12/2006
8/8/2006
3/28/2006
11/1/2005
6/30/2005
2/2/2005
9/21/2004
5/4/2004
12/9/2003
8/12/2003
1/29/2003
0.00%
Target Fed Funds…
• U.S. Fed is rather unique amongst world central banks in that it is charged with
restraining inflation and promoting economic growth
• Target Fed Funds rate is most significant monetary policy tool
• Current Fed keeping rates low, ZIRP, until signs of job creation or signs of inflation
© 2014 CME Group. All rights reserved.
12
Fed Funds Futures Curve
Fed Funds Futures Curve
as of January 30, 2014
Implied Yield
1.8000%
1.6000%
1.4000%
1.2000%
1.0000%
0.8000%
0.6000%
0.4000%
0.2000%
0.0000%
• Prediction regarding future course of monetary policy implicit in Fed Fund futures prices
• Fed Fund futures listed in 36 consecutive months … facilitates matching of month with
FOMC meeting
• Options on Fed Fund futures also referenced as source of information
© 2014 CME Group. All rights reserved.
13
CME Group FedWatch
Access here: http://www.cmegroup.com/trading/interest-rates/fed-funds.html
© 2014 CME Group. All rights reserved.
14
London and the LIBOR
• Markets developed in London in
1950’s and 60’s.
• Represent USD denominated
deposits held outside the U.S.
• London Interbank Offered Rate
(LIBOR), succeeded “Prime Rate” in
the late 70’s and early 80’s as the
U.S. short-term interest market
benchmark.
• Benchmark status for corporate
funding … corporations borrow with
“floating” rate plus credit spread,
IRS.
• Rates administered by ICE
Benchmark Administration.
© 2014 CME Group. All rights reserved.
15
CME Eurodollar Futures
Most active short-term interest rate futures worldwide:
By the
Launched December 1981, market growth
numbers: facilitated by interplay vs. interest rate
swap (IRS) markets
2013 Average Daily Volume = 2.36 million
contracts
98% of Eurodollar futures volume is
electronic
© 2014 CME Group. All rights reserved.
16
CME Group Eurodollar Futures
Users and Uses
Users
Commercial & investment banks
•Swap desks, money market & repo desks, Treasury
desks, mortgage desks, corporate/credit desks,
asset/liability management
Hedge funds and Commodity Trading
Advisors (CTAs)
Uses
Price & hedge interest rate swap (IRS) exposures
Hedge corporate & commercial paper borrowing
rates
Manage asset/liability mismatches on balance
sheet
Proprietary traders
Adjust duration of fixed income portfolios
Asset managers
Trade shape of yield curve
Mortgage servicers
Outright interest rate speculation
Regional Banks
© 2014 CME Group. All rights reserved.
17
CME Eurodollar Futures
Eurodollar Futures Contract Specifications
Unit
$1 million face value, 3-month Eurodollar Time Deposits
Cash Settlement
Cash settled to ICE LIBOR 3-month Eurodollar Interbank Time
Deposit Rate
Quote
In terms of "IMM index" or 100 less yield, e.g., yield of 0.85% quoted
as 99.15
Tick Size
One-half basis point (0.005) = $12.50; except in nearby month, tick is
one-quarter basis point (0.0025) =$6.25
Months
March quarterly cycle of March, June, September and December,
extending out 10 years (total of 40 contracts); plus 1st 4 “serial”
months not in March quarterly cycle
Hours of Trade
Floor trading Monday - Friday 7:20am CT - 2:00 pm CT
CME Globex® Sunday - Friday 5:00pm CT - 4:00pm CT
Final Trading Day
2nd London bank business day prior to 3rd Wednesday of contract
month. Trading in expiring contract closes at 11:00am London time on
last trading day
© 2014 CME Group. All rights reserved.
18
Eurodollar Fundamentals
IMM Index
Quote
Price
Quote
(99.1550)
Yield
(0.8450)
100.00
Basis
Point
Value
$1,000,000
Days/360
(90/360)
0.01%
BPV
$25.00
© 2014 CME Group. All rights reserved.
19
Eurodollar Fundamentals
Outright vs. Spreads
Outright
Contracts
Spreads
• Years 1-10
• 40 quarterly contracts plus 4 serial contracts
• Simultaneous purchase and sale of contracts in
different months
• Calendar spreads, butterflies, condors, etc.
• Spread traders provide a great deal of liquidity in
the Eurodollar contracts
© 2014 CME Group. All rights reserved.
20
© 2014 CME Group. All rights reserved.
COPPER
4.0
COPPER
5.0
COPPER
COPPER
SILVER
SILVER
SILVER
SILVER
PINK
PINK
PINK
PINK
ORANGE
ORANGE
ORANGE
ORANGE
PURPLE
PURPLE
PURPLE
PURPLE
GOLD
GOLD
GOLD
GOLD
BLUE
BLUE
BLUE
BLUE
GREEN
GREEN
GREEN
GREEN
RED
RED
RED
RED
WHITE
WHITE
WHITE
WHITE
Shifting of Eurodollar Curve
% Yield
6.0
January 2014
May 2013
April 2013
3.0
2.0
1.0
0.0
21
Hedging STIR Exposure with Eurodollars
Sell Eurodollar Futures
Hedge risk of
rising rates
Buy Eurodollar Futures
Hedge risk of
declining rates
© 2014 CME Group. All rights reserved.
22
Options on Eurodollar Futures
Different risks require different solutions
• These contracts make it possible to use a wide range of trading strategies to suit a
number of goals.
ADV
Year-End OI
Eurodollar Futures
2,052,580
10,154,610
Eurodollar Options
110,402
7,145,550
Mid-Curves
484,263
10,184,340
• Long-dated Quarterly out 4-years
• Short-dated Quarterly & Serials out 5-years
© 2014 CME Group. All rights reserved.
23
Options on Eurodollar Futures
• Eurodollar Options expanded from 12 to 16 quarterlies on Nov. 18, 2013
• Weekly Options added on 2 and 3-Year Mid-Curves on Nov. 18, 2013
• Expirations ranging from weekly to December 2017, close to 4 years out
© 2014 CME Group. All rights reserved.
24
QuikStrike Essentials
Free Web-based Options Analytics Tool
• Visibility into Current and Historical Volatility by Strike
• Concise Volume and Open Interest Information
• Spread Analysis and Risk Graphs
• Options Pricing Analysis
Access here: www.cmegroup.com/quikstrike
© 2014 CME Group. All rights reserved.
25
U.S. Treasury Futures based Products
© 2014 CME Group. All rights reserved.
26
U.S. Treasury Futures Volume (by contract) 2004-2013
© 2014 CME Group. All rights reserved.
27
CBOT Treasury Futures Contract Details
Face Amount
Deliverable
Maturity
2-Yr T-Note
Futures
5-Yr T-Note
Futures
10-Yr Note
Futures
T-Bond
Futures
Ultra T-Bond
Futures
$200,000
$100,000
$100,000
$100,000
$100,00
1 ¾ - 2 Years
4 1/16 – 5 ¼
Years
6 ½ - 10 Years
15 – 25 Years
25 – 30 Years
Contract Months
March Quarterly Cycle: March, June, September and December
Trading Hours
Open Outcry: Mon - Fri 7:20am – 2:00pm CT | Globex: Sun – Fri 5:00pm – 4:00pm CT
Last Trading and
Delivery Day
Last business day of contract
month; delivery may occur on
any day of contract month up to
and including last business day
of month
Day prior to last seven (7) business days of contract
month; delivery may occur on any day of contract
month up to and including last business day of month
Minimum Tick
¼ of 1/32 of
1 point
¼ of 1/32 of
1 point
½ of 1/32 of
1 point
Minimum Tick
Value
$15.625
$7.1826
$15.625
1/32
of 1 point
$31.25
1/32
of 1 point
$31.25
For complete information, visit http://www.cmegroup.com/trading/interest-rates/
© 2014 CME Group. All rights reserved.
28
Price Quotations and Tick Values
Price
Quotations
Tick
Values
• 2-Year and 3-Year Note prices quoted in points
per $2000
• All other US Treasury Futures quoted in points
per $1000
• Minimum tick size for 30-Year Bond and Ultra
Bond contracts are 1/32nd of one point ($31.25)
• 10-Year Note is half of 1/32nd of one point
($15.625)
• 5-Year, 3-Year, and 2-Year Note contracts are
one quarter of 1/32nd of one point ($7.8125)
© 2014 CME Group. All rights reserved.
29
Trading Example
Example 1: A trader believes that the US economy is strengthening and intermediate Treasury
yields will increase
• Trader sells 10 contracts of March 2014 5-year T-Note futures @ 120 25/32nd
Open:
• Trader buys back the 10 March 2014 5-year T-Note futures @120 03/32nd
Close
Contract
Specs
Results
• The tick size for 5-year T-Note futures is ¼ of 1/32nd of 1 point
• The dollar value for minimum tick for the 5-year T-Note futures is $7.8125
• Number of ticks made on the trade = (25/32 – 3/32) * 4 = 88 Ticks
• Profit on this example trade = 10 Contracts X 88 Ticks X $7.8125 = $6,875
© 2014 CME Group. All rights reserved.
30
Trading Example
Example 2: The monthly US non-farm payroll number on the first Friday of a month comes out
significantly weaker than expected. This indicates a surprisingly weakening economy.
• Trader buys 10 contracts of March 2014 10-year T-Note futures @ 125 15.5/32nd
Open:
• Trader sells back the 10 March 2014 10-Yr T-Note futures @125 23/32nd
Close
Contract
Specs
Results
• The tick size for 10-year T-Note futures is 1/2 of 1/32nd of 1 point
• The dollar value for minimum tick for the 10-year T-Note futures is $15.625
• Number of ticks made on the trade = (23/32 – 15.5/32) * 2 = 15 Ticks
• Profit on this example trade = 10 Contracts X 15 Ticks X $15.625 = $2,344
(rounded to nearest dollar)
© 2014 CME Group. All rights reserved.
31
Treasuries and Economy Historical Patterns
• Economy strengthens:
- Increase in interest rates
- Increased demand for loans
- Asset allocation out of bonds into
stocks
- Increased likelihood of interest rate
increases by the Federal Reserve
Board
• When interest rate rise US Treasury
prices fall
• Economy weakens
- Decreased demand for loans
- Asset allocation out of stocks and into
bonds
- Increased likelihood of interest rate
decreases by the Federal Reserve
Board
© 2014 CME Group. All rights reserved.
32
Structuring A Yield Curve Trade
• Develop a yield curve outlook
• Review spread logic
• Filter out extraneous factors
• Consider possible outcomes
© 2014 CME Group. All rights reserved.
33
5-Year vs. 10-Year Yield Curve Comparison
5-Year Daily
10-Year Daily
© 2014 CME Group. All rights reserved.
34
Developing a Yield Curve Outlook
• How do you expect the
Treasury Yield to react to
interest rate developments
during the term of the trade?
- Which yields are falling?
- Which yields will steepen?
• Yields flatten as they rise
• Be aware that events can
interrupt normal yield curve
dynamics
© 2014 CME Group. All rights reserved.
35
The Yield Curve
Access Chart Here: http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/Historic-Yield-Data-Visualization.aspx
© 2014 CME Group. All rights reserved.
36
Review Spread Logic
Expectation: Yield Curve to Steepen
Trade Idea: Long 5-Year T-Note Futures | Short 10-Year T-Note Futures
Initial Futures
Price
Change in
Cash Yield
(bps)
Final Futures
Price
Difference in
Futures Price
5-Year T-Note
Futures
119-080
+20
118-100
0-300
10-Year T-Note
Futures
120-010
+10
122-090
0-240
Product
Note: You buy or sell a yield curve spread in terms of what you do on the short
maturity leg of the trade.
© 2014 CME Group. All rights reserved.
37
Review Spread Logic
Expectation: Yield Curve to Flatten
Trade Idea: Short 5-Year T-Note Futures | Long 10-Year T-Note Futures
Initial Futures
Price
Change in
Cash Yield
(bps)
Final Futures
Price
Difference in
Futures Price
5-Year T-Note
Futures
119-080
+20
118-100
0-300
10-Year T-Note
Futures
120-010
+10
122-090
0-240
Product
© 2014 CME Group. All rights reserved.
38
Filtering Out Extraneous Effects
True yield curve spread filters out directional effects
Product
Initial
Futures
Price
Change in
Cash Yield
(bps)
Final
Futures
Price
Difference
in Futures
Price
Futures
Dollar
Change
5-Year T-Note
Futures
119-080
+20
118-100
0-300
$234.375
10-Year T-Note
Futures
120-010
+10
122-090
0-240
$375.00
Goal: Filter out directional effect and design a trade that will respond only to a change in the
shape of the yield curve
© 2014 CME Group. All rights reserved.
39
Understanding the mechanics
Help from CME
• 1 Basis Point (bp) = .01% of Yield
• DV01 = Dollar Value of 1 Basis Point (bp)
in Yield
• DV01 indicates approximately what one
futures contract will gain or lose in dollars
for every 1 basis point change in yield
• Execution: Match the dollar value of a 1 bp
change in the yield of the shorter-term
maturity futures position and that of the
longer-term maturity futures position
Access here: http://www.cmegroup.com/trading/interest-rates/files/Calculating_the_Dollar_Value_of_a_Basis_Point_Final_Dec_4.pdf
© 2014 CME Group. All rights reserved.
40
Understanding the mechanics
Help from CME
Treasury Futures Empirical Duration Tool
Access here: http://www.cmegroup.com/trading/interest-rates/duration.html
As of 2/11/2014
© 2014 CME Group. All rights reserved.
41
Example of Execution
Known*: 5-Year T-Note Futures DV01 = 46.61
10-Year T-Note Futures DV01= 65.09
Calculation: 5-Year T-Note Futures DV01/10-Year TNote Futures= Spread Ratio
Execution: 46.61 / 65.09 = .7160
Results: If you expect the yield curve
to steepen, this ratio indicates that you
should go long 10 contracts of 5-Year
T-Note Futures and short roughly 7
contracts of 10-Year T-Note Futures
*As of 2/10/2014
© 2014 CME Group. All rights reserved.
42
Summary
• A yield curve spread trade is a
speculative trade, but it shifts the
burden of speculation from taking a
position on interest rate or price
direction to taking a position on
what you expect the yield curve to
do.
© 2014 CME Group. All rights reserved.
43
Options on US Treasury Futures
Different risks require different solutions
CBOT Treasury Futures
Contract
ADV
Year End Open Interest
2-Year Note
229,428
760,802
5-Year Note
695,746
1,873,458
10-Year Note
1,293,365
2,221,389
30-Year Bond
338,743
648,059
Ultra Bond
83,928
452,154
Total
2,641,210
5,945,862
CBOT Treasury Options on Futures
Contract
ADV
Year End Open Interest
2-Year Note
7,653
22,981
5-Year Note
96,573
811,877
10-Year Note
358,736
1,653,367
30-Year Bond
75,896
354,267
Ultra Bond
350
5,928
Total
539,208
2,848,420
© 2014 CME Group. All rights reserved.
44
Options on US Treasury Futures
Options on US Treasury Futures deliver a futures contract – NOT a US Treasury bond or note
Therefore they expire prior to First Position Day for the underlying futures contract
Example: March 2014 UST Options expire Friday, February 21st at 4:00pm CT
Last Trading Day: The last Friday which precedes by at least two business days the last
business day of the month preceding the option month. Trading in expiring options ceases at
the close of the regular CME Globex trading session for the corresponding futures contract.
© 2014 CME Group. All rights reserved.
45
Options on US Treasury Futures
•
Treasury Options 2013 ADV of 539,000 contracts/day – up 56% YOY
•
2013 electronic percentage – 54% in 2013
© 2014 CME Group. All rights reserved.
46
Interest Rate Options Resources
Information and Tools
Resource Papers
CME Group Interest Rate Products
www.cmegroup.com/interestrates
Eurodollar Mid-Curves
http://www.cmegroup.com/education/featuredreports/conflicting-global-signals-complicate-fedguessing-game.html
Market Maker Contact List
www.cmegroup.com/rfq
Block Trade Requirements and Vendor Codes:
www.cmegroup.com/irvendorcodes
Interest Rate Options Volume
www.cmegroup.com/iroptionsvolume
QuikStrike Options Analytics tool
www.cmegroup.com/quikstrike
Request for Cross (RFC) Information
www.cmegroup.com/rfc
Block Trade Rules and Procedures
www.cmegroup.com/block
Interest Rate Options Open Interest Profile Tool
www.cmegroup.com/iroptionsoi
Weekly Treasury Options
www.cmegroup.com/wto
Weekly Treasury Options
http://www.cmegroup.com/education/featuredreports/itcm-treasury-2014-01-07.html
Treasury Options and the U.S. Economy
http://www.cmegroup.com/education/featuredreports/blu-putnam-us-unemployment-poised-to-dipbelow-7-percent.html
Options Fundamentals
http://www.cmegroup.com/education/featuredreports/option-fundamentals-for-fixed-income-assetmanagers.html
http://www.cmegroup.com/education/featuredreports/option-strategies-for-fixed-income-assetmanagers.html
Eurodollar Mid-Curve Options
www.cmegroup.com/midcurves
© 2014 CME Group. All rights reserved.
47
Thank you
Pete Mulmat
[email protected]
Glossary Terms
Accrued interest = the interest that accumulates between fixed coupon payment dates.
ADV = Average Daily Volume, commonly used by CME to describe the trading activity in a contract.
Arbitrage = simultaneous trade between two markets using the same security. E.g. buying the same US TBond from one party while simultaneously selling it to another party at a slightly better price. This term has
morphed over time and now is used when describing trading between markets with similar securities.
Basis = usually refers to the spread between a futures contract and its underlying physical or spot market.
BPV, VBP, and DV01 = all refer to the same thing, the change in dollar value of a security caused by a
0.01% change in yield.
Carry = refers to the value or cost of financing a security over time. Can be expressed in positive or
negative terms.
CF = or conversion factor, refers to the CBOT Conversion Factor pricing system for US Treasury futures
contracts.
Coupon Yield = interest rate of a security fixed at issuance, usually expressed in annual terms. For
example, a 2% bond pays 2% interest annually. Treasuries are quoted in coupon yield expressed in
annual terms but pay interest twice per year.
© 2014 CME Group. All rights reserved.
49
Glossary Terms
CTA = Commodity Trading Advisor, designation applied to registered advisors of commodity funds.
CTD = cheapest-to-deliver, or the US Treasury security most efficient to deliver into a Treasury futures
contract.
Duration = change in value of a security to a 1% change in rate, expressed in years. For example, a bond
with a 5-year duration will loose 5% of its value if rates rise by 1%. Used to measure the risk of individual
bonds or bond portfolios.
Eurodollar = US Dollar denominated deposits held outside the US and not under the jurisdiction of the
Fed.
Face Value = a.k.a. Par Value, or par, the dollar amount to be repaid to holder of the security at maturity,
e.g. A $1,000 face value, 2% 10-Year Note will pay 1% twice a year for ten years and at the last payment
return the to the holder $1,000.
Fed = short for Federal Reserve, the US Central Bank.
Fed Funds = rate a which member banks may trade balances held at the US Fed.
IMM = International Monetary Market, a division of the Chicago Mercantile Exchange.
© 2014 CME Group. All rights reserved.
50
Glossary Terms
IRS = as it relates to the capital markets refers to Interest Rate Swaps.
LIBOR = London Inter-Bank Offer Rate, cash benchmark rate determined by survey of London based
banks. Used extensively by the IRS market to price floating rate side of swaps.
OI = Open Interest, used by exchanges to describe open positions at the end of a daily trading session.
Repo = agreement to sell and repurchase a security in exchange for terms. The Repo market for US
Treasuries provides overnight funding for banks and dealers in government securities and allows short
sellers of securities to borrow securities in exchange for funds.
STIR = Short-Term Interest Rates
Swaps = a derivative in which counterparties exchange cash flows of one party’s financial instrument for
those of the other party’s financial instrument.
TED = Treasury versus Eurodollar spread.
US Treasuries = or “Treasuries”, debt issued by the US Federal Government offered in multiple maturity
dates auctioned on a regular auction schedule. Treasuries are made up of T-Bills, T-Notes, T-Bonds, and
TIPS.
UST-Bills = Treasuries with original maturity of less than 1-year.
© 2014 CME Group. All rights reserved.
51
Glossary Terms
UST-Notes = Treasuries with original maturities of 2-years but no more than 10-years.
UST-Bonds = Treasuries with original maturities of more than 20-years.
Yield = refers to return on investment but can mean different things i.e. coupon yield, yield to maturity,
current yield, and tax except yield all describe different aspects of a bond’s yield.
Yield-to-Maturity = or YTM, an estimate of what the investor will receive if the bond is held to maturity.
ZIRP = Zero Interest Rate Policy, policy of the Fed to hold Fed Funds rate at near zero percent.
© 2014 CME Group. All rights reserved.
52