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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RISK DISCLOSURE STATEMENT

PROGRAM AVAILABILITY IS DEPENDENT ON YOUR COUNTRY OF RESIDENCY AND FINANCIAL STATUS

PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. EXAMPLES OF HISTORIC PRICE MOVES OR EXTREME MARKET CONDITIONS ARE NOT MEANT TO IMPLY THAT SUCH MOVES OR CONDITIONS ARE COMMON OCCURRENCES OR ARE LIKELY TO OCCUR.

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT.

IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADE PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF THE HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.

BID/ASK SPREADS, BROKERAGE COMMISSION, CLEARING, EXCHANGE AND REGULATORY FEES WILL HAVE AN ADVERSE IMPACT ON THE NET OVERALL PERFORMANCE OF YOUR ACCOUNT. PRIOR TO MAKING A DECISION TO PARTICIPATE IN ANY INVESTMENT MAKE SURE YOU FULLY UNDERSTAND THE FEES ASSOCIATED WITH TRADING.

THE INFORMATION PROVIDED IN THIS REPORT CONTAINS RESEARCH, MARKET COMMENTARY AND TRADE RECOMMENDATIONS. YOU MAY BE SOLICITED FOR AN ACCOUNT BY ONE OF OUR REPRESENTATIVES OR EMPLOYEES. IT SHOULD BE KNOWN THAT THE REPRESENTATIVES OF OUR FIRM MAY TRADE FUTURES AND OPTIONS FOR THEIR OWN ACCOUNTS OR THOSE OF OTHERS. DUE TO VARIOUS FACTORS (SUCH AS MARGIN REQUIREMENTS, RISK FACTORS, TRADING OBJECTIVES, TRADING INSTRUCTIONS, TRADING STRATEGIES, AND OTHER FACTORS) SUCH TRADING MAY RESULT IN THE LIQUIDATION OR INITIATION OF FUTURES OR OPTIONS POSITIONS THAT DIFFER FROM THE OPINIONS AND RECOMMENDATIONS FOUND IN THIS REPORT.

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE. THE RISK OF LOSS IN TRADING FUTURES CONTRACTS OR COMMODITY OPTIONS CAN BE SUBSTANTIAL, AND THEREFORE INVESTORS SHOULD UNDERSTAND THE RISKS INVOLVED IN TAKING LEVERAGED POSITIONS AND MUST ASSUME RESPONSIBILITY FOR THE RISKS ASSOCIATED WITH SUCH INVESTMENTS AND FOR THEIR RESULTS.

YOU SHOULD CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR CIRCUMSTANCES AND FINANCIAL RESOURCES.

Published by

Asset Investment Management

Family Office, Advisors

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