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Dear Sir,
I have some questions about IRF which maybe outside the lectures but I really would like to know to understand the mechanism of future market:
1. When we sell or buy a interest rate future, is there any actual payment we must pay at that time ?(to a margin account as required by the Exchange, for example).
2. What are the obligation of buyer and seller of a interest rate future. As I remember, the lecture and notes have not mentioned yet.
3. Is there any case that we cannot close out a transaction because we cannot find any party that sell/buy the future we need to buy/sell? If yes, what we would deliver in case the underlying asset is the interest rate, not a bond?
Thank you sir!
1. A margin is payable – it is a deposit that is returned at the end. This is covered in the lectures.
2. This is dealt with in the lectures. The obligation is to complete the contract. If you buy futures then you must ultimately sell them. If you sell futures you must ultimately buy them.
3. We are not buying or selling anything “physical”. As again I explain in the lecture it is effectively just a gamble. We not are not looking for another party to buy or sell from – it is just a deal with the dealer. Because the futures market is so heavily traded, the dealer always has people to sell to and buy from – he/she simply adjusts the price from day to day to ensure that there is an active market.
Thank you sir, I got the idea of gamble.
Just 1 more question: in a theory case only, if there were so obvious signals that interest rate would increase, every borrower who joining future market would sell futures to buy back in the future time. Then there is a problem: who would be crazy enough to buy these futures because it is certain that they would make a loss in future time?!
This problem leads me to a conclusion: future market only exists with the condition that speculations of market participants are different: some people think interest will rise whereas others think reversely. Someone will gain from the money of someone who make loss. Is that correct?
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