Interest Rates
What are interest rates?
Interest rate products are often used by investors as well as banks and companies to hedge the risk of moves in interest rates.
Interest rates are ususally traded as futures contracts or over-the-counter (OTC) between counterparties. An interest rate future is a futures contract in which the buyer and seller agree that an interest-bearing asset will be delivered.
The price of an interest rate future reflects sentiment about what the market expects on contract expiry date.
What moves interest rates?
Announcements by central banks to set interest rates
Economic performance of a country
Trust between banks in mutual lending
Liqudity in the interbank market
Which are the most popular interest rate markets?
Euribor
The Euro Interbank Offered Rate is based on the unsecured interest rates between banks in the Eurozone. The Euribor interest rates are between a month and a year.
Eurodollar
The Eurodollar refers to interest rates on U.S. dollars held by banks outside the United States. The price is based on the Euro-Dollar Futures contract, which is traded on the Chicago Mercantile Exchange (CME).
Short Sterling
The Short Sterling contract is used to speculate on possible changes in the Bank of England's base rate and is usually strongly correlated with UK interest rates.
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