Interest Rate Futures

Derivatives are quite controversial. They create a certain amount of opportunities that many investors find appealing. However, derivatives are being blamed for recent economic troubles. Not all derivatives contribute to the recent economic hardship that many investors and everyday people are experiencing. Interest rate futures are a type of derivative that is valued as an interest bearing investment. With this type of investment, the interest is considered the underlying asset to the investor. Interest rate futures are investments that are primarily used to hedge against future interest rate moves that can affect the investor in a negative way. In other words, investors always face the risk of the rise in interest rates. Interest rate futures hedge against these possible adverse moves. Interest rates and bond prices have a relationship that interest rate futures hedge against by using inverse investment strategies. Investors who sell a future, and the interest rate rises in the future, means that the investor’s value associated with that investment will fall. Profits can be made by investors when buying futures that are being sold during the time that interest rates rise.

The way that interest rate futures protect the investor from possible rises with interest rates is fairly simple. When an interest rate futures contract is purchased, the investor is locking in a set interest rate regardless of which direction interest rates will move in the future. The underlying asset is valued according to the overall debt obligation. Debt obligations are the driving factor behind interest rate futures. If interest rates rise, the futures contract is sold at an amount that equals the higher interest rate that it is being sold at. In other words, even though interest rate futures allow the investor to lock in a set interest, the investor is still able to sell their futures contract at a higher price if interest rates rise. If interest rates fall, the futures contract is sold to the buyer, but the seller must make up the difference of the lower interest rate. Investors can research interest rate futures accurately by using a price index. The price index will expose the gains or loses associated with that particular interest rate futures contract. The price index will keep track of any fluctuation that interest rates may experience. As the interest rate rises, the price moves lower. As the interest rate falls, the price moves higher. Interest rate futures are also a way that many investors use as a means of hedging against risks.

Purchasing interest rate futures contracts help the investor diversify their portfolio and offset other interest rate risks. Since interest rate futures act as a way to invest in an inverse way, they will gain higher returns if other investments lose returns. If the investor earns a gain with traditional investments, then they will be losing a return with their interest rate futures contracts. Purchasing interest rate futures contracts is one of the most common ways that investors diversify their portfolios and hedge against risk. Interest rate futures contracts are also used to hedge forward contracts.

There are many types of interest rate futures that are traded on the market. Eurodollars, Euroyen, Treasury bills, Fed funds, Mexican Treasury bills and others are all different ways that investors can invest in when dealing with interest rate futures. Investors are advised to do their research on how they can use interest rate futures for successful investments. Investors also should take the time and learn how their current investments can be hedged by using interest rate futures contracts. Successful portfolios always show investments that hedge against risks that are associated with other types of investments.

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