Saturday, August 15, 2009

Eurodollar interest rate futures(3)

The futures market is thus useful for lenders \depositors who wish to lock into a specific future interest rate in Eurocurrencies. If you know that you will have funds to invest in the future for a specific period of time, the futures markets offers you the opportunity to avoid a fall in interest rates by fixing the interest rate now through buying a futures interest rate contract for Eurodollar delivery at the expected future time. At the specific future date, the futures contract is completed and the contract margin adjustment funds plus the anticipated investment funds are invested at the current market rate of interest. If interest rates have fallen by the time the investment is made and the futures contract is due, the holder of the future contrast will settle the margin account payments due on the contract and invest them along with the new funds at the then-current interest rate. At the end of the investment period, she will earn approximately the same amount as the initial futures contract rate even though there was an actual decline in interest rates. The gain in the futures contract, which will be invested a long with the newly acquired funds, will result in a rate of return similar to the initial rate in the futures contrast even though the entire amount is earning a lower rate of market interest. This activity is referred to as a long hedge.

No comments: