Page 141 - DMGT513_DERIVATIVES_AND_RISK_MANAGEMENT

Derivatives & Risk Management

Notes the settlement procedure is described in general. Readers interested in the exact contractual
details should contact the exchange.

Did u know? What is invoice price?
Invoice price is the price paid out by the buyer of the futures to the seller of futures for
taking physical delivery of the bond.
Invoice Price = (Futures Settlement Price × Conversion Factor) + Accrued Interest

Self Assessment

Fill in the blanks:
1. ……………. futures are contracts of the future delivery of interest-bearing securities (debt).

2. A T-bill future is traded on the …………………..in Chicago.
3. T-bill Futures prices are quoted relative to an …………..value.
4. The ….......……price for a T-bond or T-note future is the same as the price for T-bonds and
T-notes.
5. The speculator then can benefit from the sales of Treasury bond futures contract at a
………….price.

10.2 Euro-Dollar Derivatives

The origin of the Eurodollar market is rather obscure. However, it is generally agreed, that it
originated in the early 1950s by the desire of the Soviet Union and Eastern European countries
to place their dollar holdings in European banks to avoid the risk of such balances being blocked
if deposited in US banks.

Basically the Eurocurrency market has thrived on one basic reason, i.e., government regulation.
By operating in Eurocurrencies, banks, suppliers of funds are able to avoid certain regulatory
costs that would otherwise be imposed.

Briefly, the fast growth of the Eurodollar market in the 1965-1980 period has been attributed
mainly to the following four major factors:
1. Large deficits in the US balance of payments, particularly during the 1960s, which resulted
in the accumulation of substantial dollars held by foreign financial institutions and
individuals.
2. The restrictive environment which prevailed in the United States during the 1963-1974
period to stem capital outflows. These restrictions, which took the form of both voluntary
and mandatory controls, encouraged US and foreign multinational companies to borrow
dollars abroad.
3. The massive balance of payments surpluses realised by OPEC countries due to sharp
increases in oil prices in 1973-1974 and again in 1978. A good proportion of these
"petrodollars" was deposited in financial institutions outside the United States.
4. The efficiency and lower cost base of the Eurodollar market. Being a wholesale funds
market, operating free of restrictions at a substantially lower cost than its counterpart in
the United States, it has been able to attract dollar deposits by offering higher interest
rates, as well as making dollar loans available to borrowers at lower interest rates.

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