STIR Futures: Trading Euribor and Eurodollar futures by Aikin Stephen

Author:Aikin, Stephen [Aikin, Stephen]
Language: eng
Format: epub
ISBN: 9780857192653
Publisher: Harriman House Ltd
Published: 2012-11-15T18:30:00+00:00

Creating spreads from spreads

There is a third way, however. It is possible to create spreads from spreads. A 12-month spread like the H2H3 must be the same as the four three-months spreads within its interval period, in this case H2M2 + M2U2 + U2Z2 + Z2H3. It must also be the same as:

two six-month spreads (H2U2 + U2H3), or

nine-month + three-month spread (H2U3 + U3Z3), or

three-month + nine-month (H2M2+M2H3).

The wider the spread interval, the more trade permutations and ways of establishing other spreads there will be. Most traders will use this approach to either convert an existing spread into another that is perhaps more liquid, or has a shorter interval, or even to convert a long position in a spread into a short position if their views on the shape of the curve have changed.

An easier way to look at this and the trading possibilities is to reduce the matrix to show only the spread intervals.

Fig. 3.6 – Data from spread matrix, but only showing the spread intervals

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