What is the underlying asset of interest rate futures? (2024)

What is the underlying asset of interest rate futures?

Interest rate futures prices move inversely to interest rates. Investors can speculate on the direction of interest rates with interest rate futures or use the contracts to hedge against rate changes. Most interest rate futures that trade on American exchanges have U.S. Treasury securities as their underlying asset.

What are the underlying assets in a futures contract?

Stocks: In the context of options or futures contracts, shares of individual companies act as the underlying assets. The value of the derivative depends on the price movements of these stocks. Commodities: Assets such as gold, silver, oil, natural gas, agricultural products, and more can serve as underlying assets.

What is underlying value in futures?

Let us quickly sum it up. An underlying is normally an asset like an equity or a commodity or a bond but it can also be a national asset like the nifty index or foreign currency exchange rates etc. Underlying is the source of value for the derivative contract.

What is the underlying interest rate?

Underlying interest refers to the assets, liabilities, other interests, or a combination thereof underlying a derivative instrument, such as any one or more securities, currencies, rates, indexes, commodities, or derivative instruments.

What is the formula for interest rate futures?

IMM Index = Futures Price = 100.00 – Interest Rate. so that if the yield is 6 percent, the futures price is IMM Index – 100.00 – 6.0 = 93.00.

What is the difference between futures and underlying assets?

Futures are an obligation to the buyer and the seller. The seller of the future agrees to provide the underlying asset at expiry, and the buyer of the contract agrees to buy the underlying at expiry.

What is an example of an underlying asset in derivatives?

The underlying assets can be stocks, market indices, currencies, commodities, etc. For example, an option on stock 'X' gives the holder the right to buy or sell 'X' at the strike price up until expiration. The underlying asset for the option is the stock of 'X'.

What is an example of an underlying asset?

Stocks, bonds, commodities (such as gold, oil, or cotton), interest rates, market indexes, and currencies are underlying assets that influenced the creation of many financial derivatives.

Why trade futures instead of options?

If you are limited to trading stock or index options, the stock market may be closed when the opportunity strikes and you cannot react until the next trading session. When trading futures, you can usually place a trade in many key markets the moment an opportunity arrives.

What is the formula for futures trading?

The formula for computing futures prices can be expressed as: Futures Prices = Spot Price * [1 + (RF * (X/365) - D)], where: The risk-free return rate, RF, signifies the rate one can earn throughout the year in a perfect market.

What is an interest rate cap asset?

An interest rate cap structure refers to the provisions governing interest rate increases on variable-rate credit products. An interest rate cap is a limit on how high an interest rate can rise on variable-rate debt. Interest rate caps can be instituted across all types of variable rate products.

What are the three main components of interest rate?

What are the three types of interest rates?

Different types of interest rates, such as real, nominal, effective, and annual, are set apart by critical economic factors. The nominal interest rate, or coupon rate, is the actual price borrowers pay lenders, without accounting for any other economic factors.

What happens to futures when interest rates rise?

As pressure to raise interest rates rises, futures contracts will reflect that speculation as a decline in price. Price and yield will always be in an inversely correlated relationship. It is important to note that interest rate futures are not directly correlated with the market interest rates.

What is the difference between interest rate futures and bond futures?

Interest Rate Futures Vs Bond Futures

The main difference between Interest Rate Futures and Bond Futures is that Interest Rate Futures are linked to the movement of interest rates, while Bond Futures are based on specific bonds and used for hedging or speculating on bond prices.

Do futures have interest rates?

Interest rates are one of the most important factors that affect futures prices; however, other factors, such as the underlying price, interest (dividend) income, storage costs, the risk-free rate, and convenience yield, play an important role in determining futures prices as well.

Do you own the asset in futures?

Many traders find this more accessible because you don't have to take on the obligation to buy or sell, and you won't be taking ownership of the underlying asset. Plus, there are possible tax benefits. Start trading futures with a live account.

What are the three types of futures?

There are many types of futures, in both the financial and commodity segments. Some of the types of financial futures include stock, index, currency and interest futures. There are also futures for various commodities, like agricultural products, gold, oil, cotton, oilseed, and so on.

Why futures are better than cash?

In the futures market, parties don't exchange the asset straight away; they essentially commit to a future transaction through these contracts. It's a strategic arena for investors to hedge risks or speculate on price movements in anticipation of future market conditions.

What is the difference between underlying and derivative?

Underlying refers to the security or asset that must be delivered when a contract or warrant is exercised. In derivatives, the underlying is the security or asset that provides cash flow to a derivative. The underlying of a derivative can be an asset, an index, or even another derivative.

Can bond be an underlying asset?

Bonds: Bonds issued by governments or corporations can act as underlying assets. Derivatives based on bonds provide investors with exposure to interest rate movements or credit risk associated with these fixed-income securities.

Can a derivative be the underlying asset of another derivative?

An underlying asset can be a stock, commodity, index, currency or even another derivative (E.g. volatility index, VIX) product. Some exotic derivatives, like weather derivatives, may even have a non-financial entity as their underlying asset.

What is an underlying in a derivative?

An underlying market is the market on which a derivative is based. This might also be called an underlying asset. You can trade derivatives contracts based on many underlying markets, from commodities such as oil and gold, to stock indices, to spot forex.

What is the difference between CFD and underlying assets?

A contract for difference (CFD) allows traders to speculate on the future market movements of an underlying asset, without actually owning or taking physical delivery of the underlying asset. CFDs are available for a range of underlying assets, such as shares, commodities, and foreign exchange.

What are the underlying assets in currency derivatives?

Currency Derivatives are exchange-traded contracts deriving their value from their underlying asset, i.e., the currency. The investor buys or sells specific units of fixed currency on a pre-specified date and rate.