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