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To hedge against interest rate risk, we will sell futures today and buy back on the date of the transaction.
But how do we sell interest rate futures? And who is going to purchase it?As I explain in my free lectures, you are not actually selling anything – it is effectively ‘gambling’. Selling now is just a phone call to the dealer and means you have to “buy” later and it is only at the end of the trade that you settle up with the trader.
It is the same with shares – you can sell today shares that you do not own, but you have to buy back later. It is then that you take any profit or you pay out any loss.
Thank you, Sir, for your explanation. Your lectures are really helping me to understand the concepts.
Still, have one doubt as we know Interest rate futures are exchange-traded standardized contracts(legal agreement), will a phone call be enough or are there any other formalities?Yes – you are required obviously to state the number of contracts and to pay a large deposit (the margin) to the dealer which is returned at the end of the deal together with any gain or less any loss. Any legal requirements there may be are irrelevant for the exam.
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