O
One2Go
Member
I'd be grateful if someone could let me know if what i'm thinking is right...
With Interest Rate Futures, if an investor has a long position then they effectively agree to lend money and so receive interest payments based on an agreed rate.
In the meantime, if interest rates go up, then the payoff from the long position isn't as big as it was and the long investor would have to pay more margin. This would be financed at higher interest rates than previously.
If it was a forward, there'd be no margin and hence a forward is more attractive and the price of the forward is greater than the price of the future.
Is this right? I was getting confused by the long position buying the contract but lending the money, together with the fact that interest rates going up should be good for a lender - but not if you've locked in to a rate.
Thanks
With Interest Rate Futures, if an investor has a long position then they effectively agree to lend money and so receive interest payments based on an agreed rate.
In the meantime, if interest rates go up, then the payoff from the long position isn't as big as it was and the long investor would have to pay more margin. This would be financed at higher interest rates than previously.
If it was a forward, there'd be no margin and hence a forward is more attractive and the price of the forward is greater than the price of the future.
Is this right? I was getting confused by the long position buying the contract but lending the money, together with the fact that interest rates going up should be good for a lender - but not if you've locked in to a rate.
Thanks