Pricing financials for futures trading

(Last Updated On: July 8, 2015)
Pricing financials for futures trading 

Download images financials
From the futures and options course as in the video below
Three types of financial futures:
Currency's. E.g. yen and euro
Debt instruments. Examples include T-bones European bonds or euro dollar
Equity instruments as an SNP 500 or single stock

Characteristics of debt instruments:
Interest is paid
Instruments have face value
Have the maturity date
Terms of I payments are specific

Role of interest rates:
Interest rates allocate funds across financial markets
T-bonds/bills so by the Fed but there is a large secondary market
It is a liquid market
Increasing awareness of edging benefits

Why are financial future so popular?
Interest rate volatility
Financial assets are global assets
Prices are highly sensitive to interest rate changes (monetary/physical, inflation, capital flows)
Liquid market
InCreasing awareness of hedging 

Term structure of interest rates:
Economic theory explains different rates on different securities by like the maturity E.g. term
You curves are of interest:
They may explain a link between short or long-term rates
You'll currently provide information on market expectations

Yield curve or interest rates against time to maturity.
Their short-term interest rates from 90 days to one year. You also have 10 year and 30 year. The higher yield is paid out for longer maturity. Most the time it should be upward sloping. Yo curve also links market expectation. 

Yield curves: 
Normally upward sloping
Slope e.g. steepness changes when interest rates change
Often negative slope when short-term rates are high e.g. late 70s or early 80s. Also negative slope in 2000. Negative slope signals that short-term rates are going down.
Often steep slope when short-term rates are low EG 1992 or 2000 2003

 The Fed can influence short-term rates. The market will control or influence the long-term rates. 
The long-term end of the yield curve may steepen with higher yield as a market improves.

If the yield curve is inverted or negative, short-term rates will come down or there is a slowdown in the economy.
If the short-term interest rate is 6 1/2% and a year later drops to 2 1/2%, it shows that the economy is slowing down. 

Yield curve is upward sloping because of liquidity preference.with everything held constant, if someone lend money to the federal government they have a slight preference for liquidity. Interest rate will differ based upon the length of time on the loan. Given uncertainty in the marketplace you don't want to tie your money up for a long period of time.

There are different shapes of your curves depending on the kind as in a T-bond versus a corporate bond. Corporate will have higher yield due to more risk than a T-bond.  

Eurodollar futures see attached image.

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