Sample Thesis Paper
Interest rate futures are a type of futures contract which is based on a debt instrument as an underlying security. This means that the instrument it is based on has to be interest bearing. What interest rate futures do is that they allow the party to the transaction to lock a specific rate for the future which is different from a rate for borrowing. This allows effective hedging to be done.
When the interest rate on the underlying debt instrument moves upwards, the buying party in the futures derivative contract will give to the seller of the security a value equivalent to what might be achieved if investment is carried out at the increased rates compared to the rate that is written in the futures contract. In the same vein, if interest rates go down, the selling party in the futures contract pays the buying party at the time of maturity. With respect to futures, the advantage is that they are exchange traded, giving them less default risk as the exchange acts as the opposite party to the transaction usually and also provides liquidity as it allows trading. However, daily settlement has to be made on the periodic fluctuations in the interest rates.