TAILIEUCHUNG - SHORT-TERM INTEREST RATE FUTURES

Interest rate hedges include a variety of different products sold to customers to help protect them against interest rate risk. In principle, interest rate hedging products can meet customers’ needs, as they provide greater certainty over future loan repayments. However, these products can also be very complex and, therefore, susceptible to mis-selling. Our review has found serious failings in the sale of interest rate hedging products to small and medium sized businesses (SMEs). We have evidence which raises concerns about the sales we have reviewed in certain banks. These concerns include (i) inappropriate sales of more complex varieties of interest rate. | SHORT-TERM INTEREST RATE FUTURES Anatoli Kuprianov Not long ago futures trading was limited to contracts for agricultural and other commodities. Trading in futures contracts for financial instruments began in the early 1970s after almost a decade of accelerating inflation exposed market participants to unprecedented levels of exchange rate and interest rate risk. Foreign currency futures introduced in 1972 by the Chicago Mercantile Exchange were the first financial futures contracts to be traded. The first interest rate futures contract a contract for the future delivery of mortgage certificates issued by the Government National Mortgage Association began trading on the floor of the Chicago Board of Trade in 1975. Today financial futures are among the most actively traded of all futures contracts. At present there are active futures markets for two different money market instruments three-month Treasury bills and three-month Eurodollar time deposits. Treasury bill futures were introduced by the Chicago Mercantile Exchange in 1976 while trading in Eurodollar futures began late in 1981. Domestic certificate of deposit futures were also actively traded for a time but that market while technically still active became dormant for all practical purposes in 1986. AN INTRODUCTION TO FUTURES MARKETS A futures contract is a standardized transferable agreement to buy or sell a given commodity or financial instrument on a specified future date at a set price. In a futures transaction the buyer sometimes called the long agrees to purchase and the seller or short to deliver a specified item according to the terms of the contract. For example the buyer of a Treasury bill contract commits himself to purchase at some specified future date a thirteen-week Treasury bill paying a rate of interest negotiated at the time the contract is purchased. In contrast a cash or spot market transaction simultaneously prices and transfers physical ownership of the item being sold. A cash commodity

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