Discussion in 'P1.T3. Financial Markets & Products (30%)' started by scorpiomanoj, Jun 21, 2009.

  1. scorpiomanoj

    scorpiomanoj New Member

    Hi David,

    Assuming today is jan 1 2009, does a 3 month euro dollar futures contract MATURING 1 year mean that the contract starts from Jan 1 2010 and matures march 31, 2010, or does it mean that the contract starts from october 1, 2009 and matures jan 1, 2010. Once again apologize for asking a very basic question.

    Manoj Kumar Halan.
  2. David Harper CFA FRM

    David Harper CFA FRM David Harper CFA FRM (test) Staff Member

    Hi Manoj,

    Nearer to your first statement. Although, because this is a derivative, may be helpful to break into two pieces:

    1. The 3-month period is "merely" part of the reference; the underlying is a 3-month interest rate.
    2. The futures contract, in your example, is a one-year contract: bought on Jan 1st and settled (at maturity) on Jan 1st. Like any future, it "merely" refers to an underyling, in this case, the underlying is the 3 month interest rate that applies on the settlement day; i.e., the 3 month (spot) rate that applies if borrowing from Jan 1st to March 31st.

    See how the futures contract (the derivative), in your example, has a one-year maturity and the underlying that is references has a three-month maturity (by design the maturity on the underlying rate "starts" when the futures settles)

    Hope that helps (please no apologies about basic questions: it is what we do, I love the basics, they are constantly teaching me!)


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