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STIR
STIR futures are unique amongst financial markets in that they have many
different expiry months trading simultaneously as part of the same contract.
For example, a STIR future such as the CME Eurodollar can have as many as
40 different quarterly expiries trading at the same time. All of these expiries
are based on the same STIR future, and will have the same specifications, but
will differ slightly in that they all have different expiries and so their prices
will change at slightly differing rates according to underlying drivers such as
changes in the term structure of interest rates.
Interest Rate Futures
• STIRs are one of the largest financial markets in the
world. The two largest contracts, the Eurodollar (US 3
month interest rates) and Euribor (European 3 month
interest rates) regularly trade in excess of two trillion
dollars and euros a day
• The STIRs futures markets are fully computerised
• STIR futures are one of the lowest risk financial
futures contracts and trading spreads or similar
strategies provides an even lower risk profile
• STIR futures are essentially financial building blocks
which makes them very suitable for trading against
each other or other interest rate contracts.
Introduction to STIR futures
• Traded on regulated exchanges that provide legal
framework, contract specifications and the trading
mechanism.
• Settled via a central counterparty to remove credit risk
between market participants
• Characterised by a unit of trading, tick size and
settlement procedures.
Differences from other future
contracts
• Multiple delivery cycles, sequential to several
years, covering a broad spectrum of the near
dated yield curve.
• Highly similar risk characteristics between
delivery cycles
• Include spread trading and other trading
strategies, allowing many different trade
permutations and ideas, with different risk
profiles.
• Most liquid class of futures by nominal value
Derived from interest rates
• Futures are broadly classed as derivatives since they
are derived from another product and are called
futures since they are not for immediate purchase or
sale but at a future date
• STIR futures are derived from interest rates covering a
deposit period of three months, extending forward
from three months up to ten years.
Contracts structure and
general specifications
• The selling and buying of STIR futures
represent a notional borrowing or lending from
the money markets. They confer the borrowing
or lending at a rate determined by the price at
which the future was transacted, for a period of
3 months
• The futures are notional in the sense that they
are cash settled. The futures will mirror
movements in the underlying market and
provide a representative profit or loss
Expiry Cycle
• Each stir future has a finite life and trades on a
quarterly expiration cycle; March, June,
September and December (H,M,U,Z)
• The year is usually added to these symbols so
that the cycle in 2014 would be H4,M4,U4,Z4
Serial months in between do exist but are
mainly aimed at Option traders
• Front 4 contracts are known as whites, next
four are known as Reds, then Green.
Unit of trading
• The trading specifications of all contracts can
be found on the individual Exchange websites.
• The unit of trading is the notional value
attached to each stir future, normally in
denominations of one million or £500,000.
Unit of trading
• This unit of trading is the notional amount that
would be nominally deposited or borrowed for
three months.
• Euribor has a nominal value of 1M euros and
this value is used to calculate its minimum
movement:– 1,000,000x(0.005/100)x1/4=12.50 euros
– A basis point is 1/100th of one percent.
Quote and tick sizes
• Stir futures trade as a quote of 100 minus the
interest rate. For example if interest rates were
4.5% then the outright future is quoted as
95.50
• The smallest permitted increment is known as
the minimum price movement (tick) and is
expressed in basis points
Price Quotes
Month
Symbol
Bid
Offer
Last
Vol
Chg
Sep 14
U4
99.180
99.185
99.180 40555
0.01
Dec 14
Z4
99.055
99.060
99.055 30667
0.02
Mar 14
H4
98.840
98.845
98.845 28909
0.02
Jun14
M4
98.460
98.465
98.465 18909
0.02
Bid/offer spread
• The notable difference with the quotes is
the bid/offer spread
• The difference between the bid price and
the offer price usually reduces to the
minimum price movement (tick).
Last Price and volume
• The last price shows where business is
currently being transacted.
• The volume shows the liquidity in the market.
In our example the combined four quarterly
months have traded 119,040 being just over 119
billion of notional interest rate trade
Buying and selling STIR
futures and spreads
• Principles of buying/selling STIRs are similar
to those of stocks, bonds or commodities.
• Buy low, sell high returns a profit!!
• The profit/loss on any stir future or spread can
be calculated as:– No of contracts x difference in open and
closing price x tick value
– Eg buy 100 euribor for 98.815 and sell
98.830 generates p&l:100 x 3 (½ )TICKS x 12.5eur = 3,750
euros
Spreads
• A spread is simply the differential between two
expiries, creating by buying and selling another
• Eg U4 future can be purchased for 99.180 and
a Z4 future sold in equal qty at 99.060.
99.180 – 99.060 = 0.120
• Market terminology dictates this spread prices
is known as 12’s as it refers to 12 basis points
difference between the two outrights.
• This would be known as a 3 month spread
• Nearest contract always quoted first in
calculation.
Futures
Symbol
Bid
Offer
Mar
Jun
Sep
Dec
H4
M4
U4
Z4
99.690
99.645
98.590
98.510
99.695
99.650
98.595
98.515
Strategy
Symbol
Bid
Offer
3mth sp
3mth sp
6mth sp
Butterfly
H4M4
M4U4
H4U4
H4M4U4
0.045
0.055
0.100
-0.015
0.050
0.060
0.105
-0.005
Spread characteristics
• A calendar spread with a larger interval
between component delivery months will be
more volatile than one with a shorter interval
• Shorter interval spreads tend to be more liquid
than longer interval spreads
• White pack spreads will be more volatile than
red pack spreads, which in turn will be more
volatile than greens
• Margin requirements will be higher on longer
interval spreads and on white pack spreads
SPREAD FACTS
•
•
•
•
•
Simultaneously long and short
Hedged
Lower margin
More ways to win
More time to work out
• Trading the mathematical difference
between 2 outrights
• Spreading takes advantage of lower risk
Yield Curves
• Is a graph showing the range of interest rates available
to investors. It is a graphic representation of market
yield for a fixed income security plotted against the
maturity of the security.
Positive Yield Curve
Flat Yield Curve
Negative/Inverted Yield Curve
Steep Yield Curve
Yield curve effect on calendar
spreads
• A steepening yield curve refers to the widening
of the difference between longer term yield and
a shorter term yield and will cause spreads to
widen
• A flattening curve refers to a narrowing of the
difference between a longer term yield and a
shorter term yield and this will cause the
calendar spreads to narrow
Yield curve and calendar
spreads
• Yield curve steepening= Calendar
spreads up
• Yield curve flattening= Calendar spreads
down
Bund & 10 Year Treasury Note
Watching
• The German Govt 10 yr Debt future is known
as the Bund
• Many traders watch the Bund and 10 Yr
Treasury Note (T Note)very closely to
determine the likely direction of STIR spreads.
• Due to the inverted nature of how the Bund &
T Note trades, a decrease in the price of the
bund indicates that the yield of the 10 Yr debt
is increasing.
• This increase in the yield indicates that the
spreads of the front white spreads are likely to
increase in value
A General overview of market movement
Bund Movement
STIR spreads
Up
Front White spreads
down
Red Spreads Up
Front white spreads Up
Red Spreads Down
Down
Credit Spread
• Credit spreads are the spreads between assets of
different credit class.
• Govt bonds such as German Schatz, Bobl and Bund
have the highest credit rating and lowest credit risk of
any class of security.
• STIR futures are based on the inter-bank market and
are of a lower credit rating.
Economic Data
• Retail Sales- RS are a monthly report
of consumer spending. A lower than
consensus report will tend to cause the
STIR futures to increase, indicating
economic weakness.
• Consumer Price Index- CPI is the most
popular measure of inflation in retail good
svcs. Lower figures will boost the markets
whilst a higher number will infer higher
interest rates since the majority of central
banks target inflation.
• Producer Price Index- PPI is like CPI
but measures the change in prices paid.
Same effect on the markets as CPI.
• Industrial Production-Monthly figure
of industrial output
European Figures
• GDP-Gross Domestic Product
– Measures how quickly an economy is
growing. A weaker than expected figure will
tend to cause future prices to increase, to
stimulate the economy. Bear in mind that the
quarterly GDP lags other monthly
indicators, meaning market may have
already factored this in.
• German ZEW economic sentiment indicator
– The ZEW is released monthly, usually on the 2nd
or 3rd Tuesday of the month. Up to 350 financial
experts take part in the survey and the indicator
reflects the difference between the share of
analysts that are optimistic and the share of
analysts that are pessimistic for the expected
economic development in Germany over the next
6mths.
• German IFO Business Survey
– It is a predictive indicator of the economic
performance based upon survey answers
from 7000 German business leaders in the
main sectors of manufacturing, retail,
construction and wholesale. The expectations
component is a forward looking indicator of
industrial production and has a good history
of forecasting changes.
US Figures
• Non Farm Payroll
– Most closely watched figure in the world.
Is usually released on the first Friday of
each month and is a barometer of whether
the US economy is creating jobs or not.
• University of Michigan Sentiment– Is a private indicator of consumer attitudes
on the business climate, personal finance
and retail, reflecting sample of 500
individuals. It is regarded as a superior
consumer confidence figure, and tends to
be a more closely watched figure at turning
points in the economy.
• Durable Goods
– Monthly figure based on future
manufacturing activity. Important
as it is forward looking indicator
gauging production in the months
ahead. It can be one of the
numbers to indicate a forthcoming
change in the state of the economy.
• Consumer Confidence
– Another indicator of consumer
outlook. Differs from Uni of
Michigan in that it concentrates
more on attitudes to employment
and is drawn from a new sample
each month.
Economic
Release
Country
Higher than Lower than
forecast
forecast
Market
effect
ranking
Non Farm
US
Payroll
DOWN
UP
High
US jobless
US
claims
UP
DOWN
Low
GDP
ALL
DOWN
UP
Med/Low
Retail
Sales
ALL
DOWN
UP
High
CPI
ALL
DOWN
UP
High
Economic
Release
Country
Higher than
forecast
Lower than
forecast
Market
effect
ranking
PPI
ALL
DOWN
UP
Med High
PMI
ALL
DOWN
UP
Med
Consumer
confidence
US
DOWN
UP
Med High
Michigan
US
DOWN
UP
Med High
Durable
goods
US
DOWN
Ind prod
ALL
DOWN
UP
Med
Housing
ALL
DOWN
UP
Med
UP
Med
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