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Text Courtesy of Wikipedia From Wikipedia, the free encyclopedia
IMM is the International Money Market of the Chicago Mercantile Exchange
CBOT is the Chicago Board of Trade
TOCOM is the Tokyo Commodity Exchange
SFE is the Sydney futures exchange
As an example, consider the definition of the International Money Market (IMM) eurodollar interest rate future, the most widely and deeply traded financial futures contract.
There are four contracts per year: March, June, September, December (plus serial months)
They are listed on a 10 year cycle. Other markets only extend about 2–4 years.
Last Trading Day is the second London business day preceding the third Wednesday of the contract month
Delivery Day is cash settlement on the third Wednesday.
The minimum fluctuation (Commodity tick size) is half a basis point or 0.005%.
Payment is the difference between the price paid for the contract (in ticks) multiplied by the "tick value" of the contract which is $12.50 per tick.
Before the Last Trading Day the contract trades at market prices. The Final Settlement Price is the British Bankers Association (BBA) percentage rate for Three–Month Eurodollar Interbank Time Deposits, rounded to the nearest 1/10000th of a percentage point at 11:00 London time on that day, subtracted from 100. (Expressing financial futures prices as 100 minus the implied interest rate was originally intended to make the contract price behave similarly to a Bond price in that an increase in price corresponds to a decrease in yield).
Financial futures are extensively used in the hedging of interest rate swaps.
A basis swap is an interest rate swap which involves the exchange of two floating rate financial instruments. A basis swap functions as a floating-floating interest rate swap under which the floating rate payments are referenced to different bases.
[edit] Usage of basis swaps for hedgingBasis risk occurs for positions that have at least one paying and one receiving stream of cash flows that are driven by different factors and the correlation between those factors is less than one. Entering into a Basis Swap may offset the effect of gains or losses resulting from changes in the basis, thus reducing basis risk.
1.against exposure to currency fluctuations (for example, 1 mo USD LIBOR for 1 mo GBP LIBOR)
2.against one index in the favor of another (for example, 1 mo USD T-bill for 1 mo USD LIBOR)
3.different points on a yield curve (for example, 1 mo USD LIBOR for 6 mo USD LIBOR)
