Chapter 35: Futures Option Strategies for Futures Spreads 701 
In some cases, the exchanges recognize frequently traded intermarket spreads 
as being eligible for reduced margin requirements. That is, the exchange recognizes 
that the two futures are hedges against one another if one is sold and the other is 
bought. 
These spreads between currencies, called cross-currency spreads, are so heavi­
ly traded that there are other specific vehicles - both futures and warrants - that 
allow the speculator to trade them as a single entity. Regardless, they serve as a prime 
example of an intermarket spread when the two futures are used. 
In the example above, assume the outright speculative margin for a position in 
either currency future is $1,700 per contract. Then, the margin for this spread would 
probably be nearly $1,700 as well, equal to the speculative margin for one side of the 
spread. This position is thus recognized as a spread position for margin purposes. The 
margin treatment isn't as favorable as for the intramarket spread (see the earlier soy­
bean example), but the spread margin is still only one-half of what one would have to 
advance as initial margin if both sides of the spread had to be margined separately. 
Other intermarket spreads are also eligible for reduced margin requirements, 
although at first glance they might not seem to be as direct a hedge as the two cur­
rencies above were. 
Example: A common intermarket spread is the TED spread, which consists of 
Treasury bill futures on one side and Eurodollar futures on the other. Treasury bills 
represent the safest investment there is; they are guaranteed. Eurodollars, however, 
are not insured, and therefore represent a less safe investment. Consequently, 
Eurodollars yield more than Treasury bills. How much more is the key, because as 
the yield differential expands or shrinks, the spread between the prices of T-bill 
futures and Eurodollar futures expands or shrinks as well. In essence, the yield dif­
ferential is small when there is stability and confidence in the financial markets, 
because uninsured deposits and insured deposits are not that much different in times 
of financial certainty. However, in times of financial uncertainty and instability, the 
spread widens because the uninsured depositors require a comparatively higher yield 
for the higher risk they are taking. 
Assume the outright initial margin for either the T-bill future or the Eurodollar 
future is $800 per contract. The margin for the TED spread, however, is only $400. 
Thus, one is able to trade this spread for only one-fourth of the amount of margin 
that would be required to margin both sides separately. 
The reason that the margin is more favorable is that there is not a lot of volatil­
ity in this spread. Historically, it has ranged between about 0.30 and 1.70. In both 
futures contracts, one cent (0.01) of movement is worth $25. Thus, the entire 140-
cent historic range of the spread only represents $3,500 (140 x $25). 
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