Futures

contracts where the holder agrees to take delivery of a given amount of the related debt security at a later date (usually no more than three years). Futures may be in Treasury bills and notes, certificates of deposit, commercial paper, or GNMA certificates, etc. Interest rate futures are stated as a percentage of the par value of the applicable debt security. The value of interest rate futures contracts is directly tied to interest rates. For example, as interest rates decrease, the value of the contract increases. As the price or quote of the contract goes up, the purchaser of the contract has the gain, while the seller loses. A change of one basis point in interest rates causes a price change. Those who trade in interest rate futures do not usually take possession of the financial instrument. In essence, the contract is used either to hedge or to speculate on future interest rates and security prices. For example, a pension fund manager might use interest rate futures to hedge the bond portfolio position. Speculators find financial futures attractive because of their potentially large return on a small investment due to the low deposit requirement. However, significant risk exists.