Cme Futures Trading System

Speculating on Interest Rates in Canada

Interest rates remain at generational lows in Canada. Will it last? Hawks believe inflation is here in all but the official statistics. They are buying gold as an inflation hedge, which they believe will eventually require high interest rates to control. Bond bulls look to Japan and the ongoing decade-long fight against deflation being waged with ever-larger debt stimulus spending. Who is right?  How can we benefit from our opinion regarding the outcome of this serious economic debate?

The futures markets in Canada offer almost the same breadth of interest rate contracts as those in the United States. At CME Group in Chicago, traders can short U.S. 10-year Treasury bills if they believe interest rates are headed up (futures prices trade inversely to yield).  Conversely, if traders believe deflation will continue trending, they will bid up U.S. long bond (30-year Treasury) futures.

In Montreal, Canadian investors can trade the CGB futures, the 10-year government of Canada bond futures contract, to gain exposure to Canadian interest rates trends. The Montreal exchange also offers a Canadian long-dated bond called the LGB, similar to the U.S. 30-year Treasury bond contract traded in Chicago. Spread trading between Canadian and U.S. interest rate markets can also be profitable for those with a prescient view of the differences between the two North American economies’ growth - or lack there of.

However, trading the two markets, Montreal and Chicago, entails currency risk. When trading across borders, a spread with each leg priced in a different currency will require dynamic rebalancing, as the exchange rate fluctuates daily. A more straightforward way to play the spread between interest rates in Canada and the U.S. uses currency futures and the cost-of-carry differential between delivery months in the Canada dollar futures priced in U.S. dollars. Currency risk is mostly eliminated compared with the bond futures spread. For the currency futures calendar spreader, the risk is only at the opening of the trade when converting Canadian dollars to U.S. dollars, and when closing out the trade and converting profit/losses back into Canadian dollars. No daily rebalancing is required as in the U.S./Canada bond spread.

How does it work? All futures contracts are priced basis the cash market. Assets that cost to carry into the future will be priced higher the further out in time they come up for delivery. For example, gold costs money to store and insure, so its market price will normally be higher further out in time the contract for the gold delivery extends.

Is It For You? Futures Trading | Futures, Commodities

Wikipedia’s response is: A Futures Market is a financial exchange where people can trade Futures Contracts.Well, what is a Futures Contract ? A Futures Contract is a legally binding agreement to buy specified quantities of commodities or financial instruments at a specified price with delivery set at a specified time in the future.

It’s important to emphasize the word Contract. The first important difference between the Futures Market and, say, the Stock Market is that the Futures Market trades contracts, not shares of stock. You’re not buying and selling a share (or piece) of a company. A Futures Contract is an agreement between investors to trade a specific quantity of a commodity or financial instrument, for example, gallons of gas or tons of wheat.

It’s fairly simple to see how commodities work. An airline, for example, agrees to purchase 100,000 gallons of fuel for their planes at the current market price, but doesn’t take delivery until sometime in the future.

That was why Southwest Airlines made money when the price of fuel was 140/barrel and other airlines had none. They had negotiated Futures Contracts with several oil companies years earlier when the price of oil was less expensive, and waited for delivery until 2007-2008. When the price of oil is cheap again, they will be buying Futures Contracts for delivery in 2011/2012.

Southwest acquired risk. If the price of crude fell below the price they paid, they paid more than they had to. Simultaneously, they reduced risk because they thought that the price of oil would go higher than their contract price. In their case, the leverage was profitable.

Now look at the oil companies. They reduced risk, believing crude oil prices would fall below the contract price they negotiated with Southwest. They acquired risk because the price of oil rose higher than the contract (thereby losing additional revenue they could have earned). In this case, their leverage was not as good as it might have been.

Here’s where you stop and say, I am not Southwest Airlines. I am an individual day trader. I do not want to buy 100,000 gallons of crude. How can I trade Futures?

Let me go on with this short article. The Chicago Mercantile Exchange (CME), where the majority of Futures contracts are traded, realized that individual investors want to trade Futures just like major institutions; individual traders want to leverage their risk as well. They also understand that small investors won’t risk millions of dollars on gallons of gas contracts or tons of wheat. Therefore, the CME decided to create an investment environment that would entice individual investors to trade Futures.

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