702 Part V: Index Options and Futures 
More will be said later about the TED spread when the application of futures 
options to intermarket spreads is discussed. Since there is a liquid option market on 
both futures, it is sometimes more logical to establish the spread using options 
instead of futures. 
One other comment should be made regarding the TED spread: It has carry­
ing cost. That is, if one buys the spread and holds it, the spread will shrink as time 
passes, causing a small loss to the holder. When interest rates are low, the carrying 
cost is small (about 0.05 for 3 months). It would be larger if short-term rates rose. 
The prices in Table 35-1 show that the spread is more costly for longer-term con­
tracts. 
TABLE 35-1. 
Carrying costs of the TED spread. 
Month T-Bill Future 
March 96.27 
June 96.15 
September 95.90 
Eurodollar Future 
95.86 
95.69 
95.39 
TED Spread 
0.41 
0.46 
0.51 
Many intermarket spreads have some sort of carrying cost built into them; the 
spreader should be aware of that fact, for it may figure into his profitability. 
One final, and more complex, example of an intermarket spread is the crack 
spread. There are two major areas in which a basic commodity is traded, as well as 
two of its products: crude oil, unleaded gasoline, and heating oil; or soybeans, soy­
bean oil, and soybean meal. A crack spread involves trading all three - the base com­
modity and both byproducts. 
Example: The crack spread in oil consists of buying two futures contracts for crude 
oil and selling one contract each for heating oil and unleaded gasoline. 
The units of trading are not the same for all three. The crude oil future is a con­
tract for 1,000 barrels of oil; it is traded in units of dollars per barrel, so a $1 increase 
in oil prices from $18.00 to $19.00, say - is worth $1,000 to the futures contract. 
Heating oil and unleaded gasoline futures contracts have similar terms, but they are 
different from crude oil. Each of these futures is for 42,000 gallons of the product, 
and they are traded in cents. So, a one-cent move - gasoline going from 60 cents a 
gallon to 61 cents a gallon - is worth $420. This information is summarized in Table 
35-2 by showing how much a unit change in price is worth.