Interest Rate - Basics
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CME Interest Rate ProductsThe Basics
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Since the introduction of nancial futures atChicago Mercantile Exchange in1972 , theimportance of futures in transferring nancial
risk has been proven by the explosive growthin the market. The vast array of CME interestrate products allows professionals to manageinterest rate risks ranging from one monthto ten years.Interest rates, which can be loosely dened as theprice of money, affect the livelihoods of individualsand businesses each and every day. The cost of a homemortgage, the nance charge applied to a credit cardbalance, the amount of interest received on a savingsaccount or the coupon on a corporate bond issue areall examples of the interest rates that influence ourpersonal and commercial activities. Like all goods andservices, interest rates are determined by the marketforces of supply and demand. However, the federalgovernment also can influence key interest rates viamonetary policy, by adjusting rates upward or down- ward to slow down or stimulate the economy. Interestrate levels often are regarded as key indicators of acountrys economic health.
The money market comprises the markets for short-term,heavily traded credit instruments with maturities of less than one year. Money market instruments includeTreasury bills, commercial paper, bankers acceptances,negotiable certicates of deposit, Federal Funds, andshort-term collateralized loans. While the markets for
these various instruments are distinct, their respectiveinterest rates reflect general credit conditions withadjustments for differences in risk and liquidity.
As the money markets have become more liquid, money managers borrow and lend in whichever markets offera price advantage. No longer willing to leave balances asunproductive, non-interest-earning demand deposits,corporations today are making more aggressive use of cash management techniques. Cash market participantsprimarily use CMEs interest rate products for pricing and hedging their money market positions.
02 CME Interest Rate Products
05 Hedging withInterest Rate Futures
06 Futures, Bundles and Packs
08 Options on Interest Rate Futures
10 Hedging with Options on Interest Rate Futures
12 Appendix A:The Synthetic Fixed Rate Loan: An Illustration
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16 For further information on CME Interest Rate futuresand options, please call 1800 -331 - 3332 or visit theCME Web site at www.cme.com.
This information has been compiled by ChicagoMercantile Exchange Inc. for general purposes only.CME assumes no responsibility for any errors oromissions. All matters pertaining to rules andspecications herein are made subject to and are
superseded by ofcial CME rules. Current CMErules should be consulted in all cases concerning specications.
The Globe Logo,CHICAGO MERCANTILE EXCHANGE,GLOBEX , and CME are trademarks of ChicagoMercantile Exchange Inc., registered in the U.S. Patentand Trademark Ofce. All other trademarks are theproperty of their respective owners.
Copyright 2002 Chicago Mercantile Exchange Inc.
I37 /1M/ 1202
CHICAGO MERCA NTILE EXCHANGE
