Interest rate futures (IFRs) - part 1

In this lesson

1. 0:00 Introduction to interest rate futures
2. 0:49 What is an ERF and how it works
3. 2:01 Standard features of ERF contracts
4. 2:58 The pricing twist: price equals 100 minus rate
5. 3:26 ERF terminology and exam presentation
6. 5:32 Why ERF prices move opposite to rates
7. 7:00 Hedging strategy: reversing the buy-sell rule

About this lesson

This video covers the unique feature that sets IRFs apart from standard futures—they're priced at 100 minus the interest rate, which means they move in the opposite direction to interest rates. You'll discover why this twist reverses the normal hedging logic: borrowers sell IRFs instead of buying, and savers buy instead of selling. By the end, you'll have a clear foundation for tackling IRF calculations and exam scenarios. Interest rate futures are standardised hedging products used to manage interest rate risk. Like other futures and forwards, they give you a fixed outcome by offsetting gains and losses as rates move. They're tradable on an exchange, come in standard sizes like €100,000 or $500,000, and typically last three months. The crucial difference is their pricing mechanism: because IRFs are priced at 100 minus the interest rate, they move inversely to actual rates. When interest rates fall, the IRF price rises, and vice versa. This inverse relationship has a profound impact on how you hedge with IRFs. Unlike forwards and FRAs where the normal rule applies (borrowers buy to hedge against rising rates, savers sell to hedge against falling rates), IRFs flip this logic. Borrowers must sell IRFs to hedge, and savers must buy. Understanding this reversal is essential for getting your hedge direction right in exam questions. The video walks you through the terminology and presentation you'll encounter in exam tables, ensuring you can interpret contract sizes, dates, and prices correctly before moving into calculations.

Duration: 7m