Lesson 3 of 5 · 12 min

Short-term interest rate futures versus FRAs

Short-term interest rate futures are quoted as 100 minus the rate, so a long gains when the market reference rate falls, and every basis point is worth a fixed amount: notional × 0.01% × period.

In short

  • Interest rate futures are a liquid, standardised alternative to FRAs on a market reference rate (MRR) for a future period from A to B.
  • Price convention: fA,B−A=100−(100×MRRA,B−A)f_{A,B-A} = 100 - (100 \times MRR_{A,B-A}). A price of 96.40 implies an MRR of 3.60%; a price above 100 implies a negative rate.
  • Long futures (like a lender) gains when MRR falls; short futures (like a borrower) gains when MRR rises.
  • Long futures ≈ short FRA (receive fixed); short futures ≈ long FRA (pay fixed).
  • Basis point value: BPV=Notional×0.01%×PeriodBPV = \text{Notional} \times 0.01\% \times \text{Period}. It is the same for rises and falls: futures are linear in the rate.

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Short-term interest rate futures versus FRAs · Pricing and Valuation of Futures Contracts