Interest Rates Examples
Buying Short Sterling
It is February 2011, and there has been widespread talk of interest-rate rises in Europe and the UK over the coming year to address stubbornly high inflation. However, you don't believe that the UK will see a rise in rates, as there are many doubts surrounding the strength of the economy. As such, you believe interest rates will be unchanged.
Opening the position
The market price for September 2011 Short Sterling is 98.60/98.61, implying the market's expectation that, in September, 3-month interest rates will be around 1.4% (100 minus 98.6). Our quotation, which does not contain the decimal point, is 9859–9862.
As the market price reflects an expected increase in interest rates, but you believe they will be unchanged, you 'buy' £10 per point at 9862. The deposit is the bet size (£10) multiplied by the deposit factor, in this case 32. So your deposit is £320.
Closing the position
You are proved right as UK interest rates hold steady at 0.50% and look set to stay that way in the medium term. Our price for September 2011 Short Sterling has risen as a result, and towards the end of June our quotation stands at 9907–9910. You decide to take your profit and close your bet by 'selling' £10 per point at 9907.
The result
Profit on deal
| Opening level | 9862 |
| Closing level | 9907 |
| Difference | 45 |
Profit: 45 x £10 per point = £450
Selling German Bund
It is July 2011, and after months of uncertainty surrounding the EU bailouts of peripheral eurozone economies, it appears that progress is being made and the crisis may be resolved in the near future. The threat of defaults had pushed the price of German Bunds up through the previous months, thanks to their safe-haven appeal.
Opening the position
You believe that with the European outlook improving, the price of Bunds will fall.
On 18 July 2011 our price for the September German Bund stands at 12920–12923 and you decide to 'sell' £5 per point at 12920.
Closing the position
Over the next few days our September Bund price fluctuates as confidence over economic recovery in the EU changes. Then on 21 July 2011, an emergency EU summit meeting is reported as reaching positive conclusions on the debt crisis, and the price of Bunds drops to 12735-12738. You decide to close the position and take your profit, 'buying' at 12738.
The result
Profit on deal
| Opening level | 12920 |
| Closing level | 12738 |
| Difference | 182 |
Profit: 182 x £5 = £910