A futures contract is a standardized contract which is traded on an established exchange. It is a contract to buy or sell a short term interest rate underlying in the future at a price specified today, that is, the initial contract price.
The contract commits the counterparties to the trade (unlike an option which does not impose any obligations on the buyer) and so it has no premium. It is always cash settled.
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The futures contract price moves in an inverse direction to the underlying interest rate, i.e., when interest rates fall the futures contract price rises and when interest rates rise the futures contract price falls. |
Currently SDX Interest Rates supports a futures contract on the following currencies—USD, EUR, Japanese yen on TIBOR (JPT), GBP, Brazilian real (BRL) and Brazilian real (offshore) (BRR).
Note that the BRL futures contract available in SDX Interest Rates is not a regular futures contract; rather it is similar to a discount bond. Accordingly, the BRL futures contract’s value on the trade date is calculated by the zero-coupon value of the notional amount (that is, its discount value computed using the futures rate), and the contract itself accrues interest daily using the DI overnight rate, i.e., the official Interbank Deposit rates.
What Is the Difference Between a Futures and a Forward?
Futures are distinguished from forwards in that:
Futures contain standardized terms, such as settlement and notional (this ensures that they are liquid); forwards are individually customized transactions between the two parties.
Futures trade on an exchange; forwards on the other hand are always traded over-the counter (OTC).
Futures are regulated by overseeing agencies; forwards are not.
Futures are guaranteed by clearing houses; forwards are not.
There is almost zero credit risk in futures. This is because intermediate gains or losses are posted each day during the life of the futures contract. Known as mark to market, this is calculated by the difference between today's futures price and yesterday's futures price. The resulting profit and loss is then exchanged immediately.
Futures are backed by both initial margin and variation margin. These margin amounts are maintained on a daily basis and ensure the creditworthiness of contract buyers and sellers. In the forward market, the credit risk is assumed by the counterparties.
Because futures are traded on many exchanges, in some cases the contracts traded on one exchange can be offset with positions on other exchanges.
Pricing a Futures Contact in SDX Interest Rates
To price a futures contract in SDX Interest Rates from the Option/Swap or Option dropdown list select Short Term Futures or simply enter the shortcut fut.
Each lot is predefined as a certain amount of money, which is then paid/received on the expiry date for each lot in the futures contract. For example, in a BRL futures contract a lot is set as 100,000 BRL. That means that on the expiry date the investor will receive/pay 100,000 BRL for each lot defined.
So when you define the number of lots being bought or sold, the total notional value of the futures contract is automatically updated by the system.