STIR Futures Trading

This two day course explains the unique properties of short-term interest rate futures and how the STIR futures market operates. Delegates will learn how to price and value STIR futures, use STIR futures to hedge interest rate exposures, and implement trading strategies such as spreads, butterflies, packs and bundles. The course also covers PCA of STIR prices, options, SOFR and SONIA futures.

Review of cash markets

  • Government Bills
  • Repo and Reverse Repo Agreements
  • Unsecured deposits

Introduction to STIR futures

  • The market for interest rate futures
  • Introduction to STIR futures and exchanges
  • Contract structure and specifications
  • Quotation conventions
  • How do STIR futures differ from other futures?
  • Outrights, Spreads, Packs, Bundles, Butterflies and Condors
  • Clearing and margining

Market characteristics

  • Size of the cash markets
  • Open Interest in the STIR futures markets
  • Volumes in the STIR futures markets

Pricing and valuation

  • The effect of credit risk on STIR valuation
  • Expectations regarding central bank policy rates
  • Short-term risk premiums
  • No-arbitrage valuation of STIR futures
  • Introduction to financing bias and convexity adjustment

Hedging with STIR futures

  • Replicating cash flow sensitivities
  • Example 1: hedging a single cash flow
  • Example 2: hedging a stream of cash flows
  • Example 3: hedging LIBOR reset risk in an interest rate swap

Speculative trading with STIR futures

  • Betting on central bank policy
  • Calendar spreads
  • Butterfly spreads
  • STIR futures vs bills
  • STIR futures vs short-dated government bonds
  • Cross-market STIR futures trades

Principal components analysis of STIR futures prices

  • Overview of principal components analysis
  • Preparation of data
  • Economic interpretation of PCA results
  • Trading PCA results

A closer look at the financing bias and convexity adjustment

  • What is the financing bias?
  • Modeling assumptions underlying different approaches to the convexity adjustment
  • Effects on yield curve stripping methodologies
  • Potential trading effects

Brief introduction to options on STIR futures

  • Market characteristics
  • Valuation models
  • Links to LIBOR caps and floors

STIR futures, FX forward rates, and covered interest parity

  • No-arbitrage relations in theory
  • Violation of no-arbitrage relations in practice
  • Market for FX swaps and cross-currency basis swaps

The future of the STIR futures market

  • Overnight Index Swaps
  • US: Secured Overnight Financing Rate (SOFR) futures
  • UK: SONIA Futures
  • Eurozone: state of discussions