Interest Rates
Overview
Corporate treasurers, financial institutions, hedge funds, professional traders
and speculators can utilize our advanced institutional front-end solutions to facilitate
a broad array of risk management and speculative functions.
By utilizing our front-end solutions, these entities can accomplish a multitude
of risk management functions such as hedge their interest rate exposures (i.e. interbank
overnight call rate and the prime overdraft rate), profit from parallel and non-parallel
shifts in the yield curve, profit from changes in swap spreads, or to enter into
speculative positions based upon their views on interest rate trends.
The interest rate derivatives industry has seen a substantial growth due to the
demand emanating from corporate treasurers, who have become more finely attuned
to the particular interest rate and credit risk facing their companies such as the
interbank overnight call rate and the prime overdraft rate. In fact, the T-Bill
and T-Bond futures represent about one-half of all futures market activity.
You can enjoy unparalleled access, technology and execution speed in the interest
rate futures markets:
- 10 yr, 5 yr, 2 yr T-Bills
- 30 yr T-Bonds
- Spreads
- Swaps
- LIBOR
Basics
Interest rates, which can be loosely defined as the price of money, affect the livelihoods
of individuals and businesses each and every day. The cost of a home mortgage, the
finance charge applied to a credit card balance, the amount of interest received
on a savings account or the coupon on a corporate bond issue are all examples of
the interest rates that influence our personal and commercial activities. Like all
goods and services, interest rates are determined by the market forces of supply
and demand. However, the federal government also can influence key interest rates
via monetary policy, by adjusting rates upward or downward to slow down or stimulate
the economy. Interest rate levels often are regarded as key indicators of a country’s
economic health.
The money markets are comprised of short-term, heavily traded credit instruments
with maturities of less than one year. Money market instruments include Treasury
bills, commercial paper, bankers’ acceptances, negotiable certificates of deposit,
Federal Funds, and short-term collateralized loans. While the markets for these
various instruments are distinct, their respective interest rates reflect general
credit conditions with adjustments for differences in risk and liquidity. As the
money markets have become more liquid, money managers borrow and lend in whichever
markets offer a price advantage. No longer willing to leave balances as unproductive,
non-interest-earning deposits, corporations today are making more aggressive use
of cash management techniques. Cash market participants primarily use CME’s interest
rate products for pricing and hedging their money market positions.
LIBOR is a reference rate for dealing in Eurodollar time deposits between commercial
banks in the London Inter-Bank Market. LIBOR is often the benchmark rate for commercial
loans, mortgages, and floating rate debt issues.