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      Publication details

      HARRIMAN HOUSE LTD

      3A Penns Road

      Petersfield

      Hampshire

      GU32 2EW

      GREAT BRITAIN

      Tel: +44 (0)1730 233870

      Fax: +44 (0)1730 233880

      Email: [email protected]

      Website: www.harriman-house.com

      First edition published in Great Britain in 2006 by Harriman House.

      This second edition published 2012.

      Copyright © Harriman House Ltd

      The right of Stephen Aikin to be identified as Author has been asserted in accordance with the Copyright, Designs and Patents Act 1988.

      ISBN: 9780857192653

      British Library Cataloguing in Publication Data

      A CIP catalogue record for this book can be obtained from the British Library.

      All rights reserved; no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without the prior written permission of the Publisher. This book may not be lent, resold, hired out or otherwise disposed of by way of trade in any form of binding or cover other than that in which it is published without the prior written consent of the Publisher.

      No responsibility for loss occasioned to any person or corporate body acting or refraining to act as a result of reading material in this book can be accepted by the Publisher or by the Author.

      About the Author

      Stephen Aikin has been a derivatives trader for over 20 years and has worked as a professional training consultant for the last five, delivering finance and derivatives courses to leading institutions in London, Zurich and New York.

      He started his career working for several investment banks. In 1988 he became a member of the London International Financial Futures Exchange (Liffe), where he started trading STIR futures on German interest rates. Stephen has specialised in relative value trading – both intra- and inter-contract – and has experienced consistent profitability over 20 years.

      He is educated to MSc (Finance) level and holds several professional qualifications in the finance sector.

      Preface

      Who this book is for

      This book is written for the aspiring trader but will also appeal to the experienced trader looking for a new market or trading strategy. Even those traders already experienced in trading STIR futures might find new inspiration and trading ideas from the sophisticated strategies presented in the trading section.

      The learning curve is steep and constant, but all the information and concepts needed by the aspiring trader are presented simply and should be easily understood. Some prior knowledge of buying and selling securities might be helpful. The websites of the futures exchanges listed in the Appendices are useful sources of introductory information.

      What this book covers

      This book does not pretend to be a guide to making a trading fortune, and neither is it selling a trading system. Instead, it is a comprehensive guide to STIR futures markets, showing how professional traders can profit from their unique characteristics, particularly by using spreads and similar trading strategies. It details all the necessary tools and methodologies for these sophisticated trading strategies, appealing to the experienced STIR futures trader, whilst also providing guidance for the aspiring trader.

      The majority of trading examples used in the book can be calculated by the use of pre-built functions that are standard within Microsoft Excel, rather than assuming that everyone has access to expensive subscription-based quantitative software.

      How this book is structured

      The book consists of four parts, designed to be read sequentially. Readers can dip into various sections but might find references to methodologies described earlier.

      1. STIR Futures

      Part 1 is a broad introduction to STIR futures, describing what they are, where they are traded, how they are priced, and how they can be used to hedge borrowing or lending exposures. This is followed by a comprehensive review of the drivers of STIR futures, which describes the underlying influences that create price movement and how this should be interpreted by traders.

      2. The Mechanics of STIR Futures

      Part 2 is concerned with the mechanics of the STIR futures markets, including clearing and settlement procedures, how the markets are accessed, the software options available, and what influences the choice of STIR futures contracts to trade.

      3. Trading STIR Futures

      Part 3 is the trading section, with the majority comprising a thorough analysis of the spread relationships that exist both within STIR futures and against other interest rate products. STIR futures are often described as the ‘building blocks of finance’, which makes them perfect for spread trading, providing many more trading permutations with lower risk profiles than traditional directional trading instruments.

      4. Trading Considerations of STIR Futures

      Part 4 covers trading considerations and provides insights into the marketplace and its population, characteristics and the trading decision-making process.

      The Appendices supply extra detail, including contact information, for those interested in taking matters further.

      Supporting website

      A website supporting this book can be found at www.stirfutures.co.uk.

      Introduction

      Most people are only aware of interest rate changes when they make the newspaper or television headlines, but interest rates are moving all the time. They are driven by the supply and demand of money being borrowed and lent in the money markets. STIR futures are one of the key financial derivatives in this market.

      STIR futures first appeared in the 1980s as the Eurodollar contract, based on US interest rate deposits traded on the Chicago Mercantile Exchange (CME). CME’s success encouraged European emulation, resulting in the formation of the London International Financial Futures Exchange (now NYSE Liffe but referred to as Liffe in the text) in the early eighties and the creation of the Short Sterling (UK rates), Euromark (German rates), Euroswiss (Swiss rates) and Eurolira (Italian rates) STIR futures.

      All futures were then traded by a method called open outcry. This involved the shouting out of order flow into a circular pit populated by traders wearing the colourful jackets of their company’s livery. Nowadays, almost all trading is computerised, creating a global virtual trading pit with no restriction on the number of participants it can hold. Consequently, STIR futures volumes have exploded in recent years. Arguably they are now the largest financial market in the world. It is not unusual for the leading STIR futures contracts, the Eurodollar and Euribor, to each trade over two trillion dollars’ or euros’ worth of interest rate transactions every day. Compare that with the $150 billion traded on a good day at the New York Stock Exchange, or even with the entire foreign exchange market, which trades approximately $3-trillion-worth per day, and it gives a clear idea of just how large the STIR futures markets are.

      However,

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