Interest Rates Examples
Selling Short Sterling
On the back of news that Mervyn King, the governor of the Bank of England, has been forced to write an explanatory letter to the chancellor after UK inflation shot up to 3.5% in January 2010, you believe interest rates will rise significantly over the coming months – and therefore that the price of Short Sterling will fall.
Opening the position
It is early February 2010 and you decide to 'sell' June Short Sterling.
The market price is 99.25/99.26, implying an expectation that, in June, 3-month interest rates will be 0.745% (100 minus 99.255). Our quotation, which does not contain the decimal point, is 9924-9927.
You 'sell' £10 per point at 9924. The deposit is the bet size (£10) multiplied by the deposit factor, in this case 44. So your deposit is £440.
Closing the position
You are proved wrong as UK interest rates hold steady at 0.50% in March and look set to stay that way in the short-term. Our price for June Short Sterling has risen slightly as a result, and towards the end of the month our quotation stands at 9929–9932. You decide to cut your losses and close your bet by ‘buying’ £10 per point at 9932.
The result
Loss on deal
| Closing level | 9924 |
| Opening level | 9932 |
| Difference | 8 |
Loss: 8 x £10 per point = £80
Buying German Bund
It is late-March 2010, and according to a Bloomberg survey the yield on the 10-year German Bund will climb to 3.7% from 3.1% by the end of the year, implying that interest rates will go up.
Opening the position
However, you believe that rather than rise, European rates will either fall or stay at current levels as eurozone economies struggle to cope with the burden of debt.
On 31 March 2010 our price for the German Bund stands at 12341–12343 and you decide to ‘buy’ £5 per point at 12343.
Closing the position
Over the next few days our price for German Bund fluctuates as confidence over economic recovery in the EU grows. On 12 April 2010 our price stands 12271–12274. If you closed your bet at this point you would stand to make a loss, but you decide to hold your position, which proves to be the right decision – on 22 April 2010 our price for German Bund reaches 12417–12420, which is as high as you think it is going to go, and you close your position by ‘selling’ £5 per point at 12417.
The result
Profit on deal
| Closing level | 12417 |
| Opening level | 12343 |
| Difference | 74 |
Profit: 74 x £5 per point = £370
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