Using interest rate parity to trade forex

For the World War II bomber, see Using interest rate parity to trade forex Stirling. It is a particular type of interest rate derivative.

Examples include Treasury-bill futures, Treasury-bond futures and Eurodollar futures. Interest rate futures are used to hedge against the risk that interest rates will move in an adverse direction, causing a cost to the company. For example, borrowers face the risk of interest rates rising. Futures use the inverse relationship between interest rates and bond prices to hedge against the risk of rising interest rates.

A borrower will enter to sell a future today. Treasury futures are contracts sold on the Globex market for March, June, September and December contracts. As pressure to raise interest rates rises, futures contracts will reflect that speculation as a decline in price. Price and yield will always be in an inversely correlated relationship. It is important to note that interest rate futures are not directly correlated with the market interest rates. In the case of notes and bonds this means the trader could potentially take delivery of a bunch of bonds if the contract is not cash settled.