Short-term interest rate products

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Short-term interest rates are the interest rates on loans or debt instruments such as Treasury bills, bank certificates of deposit or commercial paper, that have maturities of less than one year.

Short term interest rate futures (STIR futures) are one of the largest financial markets in the world. The two main contracts, the Eurodollar and Euribor regularly trade in excess of one trillion dollars and euros of US and European interest rates each day. STIR futures are traded on a completely electronic market place.[1]

Participants in the interest rate futures market are taking a view on the market’s direction -- on whether interest rates will rise or fall in the future. Those who want to protect against higher rates will want to pay a fixed rate and receive a floating rate in an interest rate swap. Correspondingly, those who anticipate a decline in rates may want to receive fixed interest rate payments and pay floating rates. Both sides are hedging against risk. A speculative market also exists for interest rates, consisting of traders seeking opportunities to profit from interest rate adjustments or market volatility.[2]

The Chicago Mercantile Exchange trades the most short-term interest rate futures and options of any exchange, averaging more than 1.6 million contracts daily. The cornerstone of the CME interest rate product line is Eurodollar futures, the world’s most actively traded futures contract and a benchmark for global investors. The Eurodollar futures provide a tool for hedging fluctuations in interest rates on U.S. dollars deposited in overseas banks.

Liffe also offers short-term interest rate products, including its flagship contract suite, the Euribor three-month interest rate contracts, which comprise EURIBOR futures, EURIBOR options, and EURIBOR Mid-Curve Options. These products had an average daily volume approaching 1.4 million contracts as of September 2007.