OVERVIEW

Some basic background is required to interpret the interest rate futures quotes provided in the financial press. In order to understand the quoting mechanism, recall the profit functions for the short and long futures speculators: Short positions benefit from falling futures prices while long positions benefit from futures price rises. However, for money market securities, the use of prices would be at variance with cash market practices, which quote in yields. Because yields move inversely to prices, a method was devised for quoting money market futures that retained the notion that longs (shorts) benefit when the futures quote rises (falls) and was still consistent with cash market practices. The futures contract is quoted as 100 ? Quote = (discount rate, expressed with the first digit starting as a whole number). For example, the June 16, 1992, T-bill for September 1992 delivery closed at 96.21. This converts to 100 ? 96.21 = 3.79. The 3-month U.S. T-bill for September 1992 delivery is being offered at a discount rate of 3.79%. A similar quoting convention is also used for Eurodollar futures contracts.

When comparing interest rates derived from money market futures quotes, it has to be recognized that most U.S. money market securities, T-bills, BAs, commercial paper (CP), and term repos are quoted on a discount rate and not a true yield (bond equivalent yield) basis. In addition to using a different pricing formula, the discount rate calculation also involves calculating the year as though it has...