An interest rate future agreement is a contract between two parties to buy or sell an underlying instrument at a predetermined price at a future date. The underlying instrument can be a bond, a note or any other debt security. Interest rate future agreements are often used by investors and traders to hedge against the risk of interest rate fluctuations.
There are two types of interest rate future agreements: a futures contract and a forward contract. A futures contract is traded on an exchange and is standardized in terms of the underlying instrument, the delivery date, and the contract size. A forward contract, on the other hand, is customized to meet the needs of the two parties involved in the agreement.
The price of an interest rate future agreement is determined by the market forces of supply and demand. The price of the underlying instrument, the interest rate, and the time to maturity are all factors that influence the price of an interest rate future agreement.
The mechanics of an interest rate future agreement are relatively simple. The buyer agrees to purchase the underlying instrument at a predetermined price at a future date, while the seller agrees to supply the underlying instrument at the agreed-upon price and date. The price of the interest rate future agreement is the price of the underlying instrument plus the interest that accrues between the agreement date and the delivery date.
Interest rate future agreements are commonly used by investors and traders to hedge against the risk of interest rate fluctuations. For example, a bond trader who expects interest rates to rise in the future may sell an interest rate future agreement to protect against the potential loss of value of their bonds. On the other hand, an investor who expects interest rates to fall may buy an interest rate future agreement to secure a lower interest rate.
In conclusion, an interest rate future agreement is a contract between two parties to buy or sell an underlying instrument at a predetermined price at a future date. Interest rate future agreements are used to hedge against the risk of interest rate fluctuations and are commonly used by investors and traders. The price of an interest rate future agreement is determined by market forces and is influenced by the price of the underlying instrument, the interest rate, and the time to maturity.