Trading 3 Month Rates Higher

Instrument

1) 3 month deposit contracts (futures symbol GE) are traded through the world’s largest dollar volume exchange group the CME.

2) Daily volume is more than 1.5 million contacts, open interest over 11 million exceeding the S&P, gold and crude oil combined. Click here for contract specifications, quotes, volume and open interest here for what this rate is and how it’s set.

3) To convert the contract price into the rate it represents

Take 100.00 – the contract price = the rate

100.00 – a contract price of 98.50 = a rate of 1.50%
100.00 – a contract price of 97.50 = a rate of 2.50%
Each 0.01 change in price = a $25.00 change in contract value

4) Trading this rate higher requires a short position as the rate moves higher the contract price falls to reflect the increase in rate.

5) Fed guidance on where rates will be and when

Click here for the Fed’s site, FOMC meeting schedule, all statements and all press conference videos
Click here for the Chicago Mercantile Exchange’s “Countdown to Higher Rates”
Click here for a 2 minute Fed Chair Yellen video telling you where the Fed sees rates and when.

Two simple trades

6) In the first example below we’re short the December 2017 (GEZ17) at 98.60, the rate the contract price represents is 1.60%, contract value $4,000, if the Fed is right about rates the contract price will fall to 96.50 and increase in value from $4,000 at 98.60 to $8,750 at 96.50.

7) Click here to enlarge the December 2017 3 month rate, price, valuation chart below
Vertical column 1 = rate, 2 = contract price, 3 = contract value

8) To experiment with any potential outcome for this trade.

In this example we’re establishing a long term trade with no hedge

Click here and open the risk/reward spreadsheet, once it opens enable it
Click here for December 2017 (GEZ17) quotes and charts

9) How to use the risk/reward spreadsheet

Enter any contract price in cell B-3
C-3 shows the rate the contract price represents
D-3 initial investment
E-3 Net profit or loss
F-3 Net liquidating value

10) If 3 month rates go to and remain at 0.00%

Enter 100.00 in cell B-3
Net profit or loss -$81,250.00 shows in cell E-3
Net liquating value $18,250.00 shows in cell F-3

11) If the Fed’s projections for rates are right between now and December 2017

Enter 96.50 in cell B-3
Net profit or loss shows in cell E-3 +$93,750.00
Net liquating value $193,750.00 shows in cell F-3

In the second example we’re using a hedged strategy

12) Click here to open the 3 month December 2017 risk/reward spreadsheet (hedged)

13) If rates go to and remain at 0.00%

Enter 100.00 in cell B-3
Net profit or loss shows in cell E-3, -$32,847.75
Net liquating value $67,156.25 shows in cell F-3

14) If the Fed is right about rates

Enter 96.50 in cell B-3
Net profit or loss shows in cell E-3, +$109,343.75
Net liquidating value $209,343.75 shows in cell F-3

Rates will rise over the next 2 ¼ years either from economic recovery or deteriorating Fed/US treasury credibility.

If you have any questions call or email

Regards,
Peter Knight

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Asset Investment Management

Family Office, Advisors

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