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 benefits 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. Join my FREE newletter to learn about futures trading from this course Sent from my iPhone
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