Futures

In this lesson

1. 0:00 Introduction to futures contracts
2. 0:36 How futures contracts fix interest rates
3. 2:15 Key specifications for interest rate futures
4. 4:57 Three-step setup for futures calculations
5. 6:46 Calculating transaction outcomes step by step
6. 8:17 Worked example: hedging deposit with futures
7. 13:51 Calculating closing futures price using basis
8. 16:59 Alternative method: using locking rates

About this lesson

You'll discover why futures are valuable for locking in rates today, the key differences between buying and selling futures contracts, and how to set up a hedge in three clear steps. This is essential knowledge for FM, AFM, and SBL papers, where hedging questions frequently appear in both objective tests and case studies. The lesson walks you through the mechanics of futures contracts, including how they expire quarterly, why prices are quoted as 100 minus the interest rate, and the crucial distinction between buying (for deposits) and selling (for borrowing). You'll learn the three-step setup process: determining whether to buy or sell, calculating the number of contracts needed using the formula that accounts for loan length and contract size, and selecting the correct expiry date. The video then breaks down the calculation phase into two parts: valuing your transaction at the closing spot rate and calculating your futures profit or loss. Using a worked example involving a nine-month deposit, the lesson demonstrates how to apply these concepts in practice, including how to calculate an effective interest rate achieved through the hedge. You'll also learn two advanced techniques: using basis calculations to determine a closing futures price when it's not given in the question, and applying the locking rate method as a faster alternative in time-pressured exams. These methods ensure you can handle any variation of futures questions with confidence.

Duration: 18m