Interest rate futures
Many short-term interest-rate futures use a price convention of 100 minus the quoted annual interest rate, so prices fall when the implied rate rises. Under that convention, selling appropriate futures can protect future borrowing against rising rates, while buying can protect a future deposit against falling rates. Contract specifications control the amount, period, tick value and settlement. Rate conventions differ across products, so do not apply the 100-minus rule universally. Margin cash flows, contract rounding, timing and basis risk can prevent a perfect offset.
Worked example
Under a 100-minus-rate convention, a move from price 96 to 94 corresponds to the implied rate rising from 4% to 6%. A short futures position gains from the price fall, helping offset increased borrowing cost.
Common mistake
Buying these futures to hedge a borrower against rising rates because the word 'rise' suggests buying, without considering the inverse price convention.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AFM | Direct | September 2026–June 2027 |
| ACCA | FM | Direct | September 2026–June 2027 |