Short-term Interest-rate Futures

Abstract

Interest-rate futures markets represent a greater break from the past than do currency futures markets. Until T-bill futures were launched on the IMM in the mid-1970s, it had not been possible for the general public to deal in dollar money-market instruments for forward delivery. In contrast, currency futures markets had been born into a world in which an already liquid market in currency forwards existed. The short-term interest-rate futures contracts differ in an important respect from other futures. In all other futures contracts, the commodity can be bought in the spot market at any time during the contract’s lifetime. Consider, however, a 91-day T-bill futures contract maturing on 15 June. A 91-day T-bill running from 15 June has a butterfly existence; it is issued on 15 June and by the next day it has become a 90-day bill. The spot market for T-bills with 91 days to maturity starting from 15 June is open for only one day. The butterfly existence of the commodity underlying the short-term interest-rate futures contract causes market-making and speculation in interest-rate futures to differ in important respects from those in other futures markets.