The difference between the current and future markets is the delivery mechanism; in the spot or current market delivery is made on the spot whereas in the futures market delivery is made at a specified future date. Through futures market individuals and firms can reduce their risk through hedging where items are sold if they are bought physically to minimize the risk if the current market fluctuates significantly.
The interest rate futures market gives a chance to hedge the interest rate and is based on the underlying benchmark included in interest rate implemented on liability of the firm. The mechanism of the interest rate futures works in a way that can minimize the risk by fluctuations in interest rates. If the interest rate rises, the buyer would compensate the seller for the higher interest rate at the time of expiration and vice versa. The interest rate futures fluctuate with the fluctuations in the current rates. For the determination of profit and loss in an interest rate futures contract the futures price index was established (Mysmp.com 2008).
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