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Good Derivatives: A Story of Financial and Environmental Innovation by Richard L. Sandor

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Chapter 7

Treasury Bond and Note Futures

Spanning the Yield Curve

To everything there is a season, a time for every purpose under the sun.

Ecclesiastes, 3:1

I talked to Les about my vision to create a family of interest rate futures products that spanned the yield curve. There was a real sense of urgency, as we knew the Chicago Mercantile Exchange was attempting to gain a foothold in the interest rate market. Mike Weinberg, the CME's chairman, had indicated that the exchange had no interest in mortgage interest rate futures because it posed too many problems.1 CME was terrific at executing ideas developed by others, such as of currency futures. I was relieved that the CME had decided not to compete with the CBOT.

Mark Powers, the CME's chief economist, came up with the idea of a futures contract on Treasury bills.2 The CME submitted an application to the CFTC in the fall of 1975, and launched a contract in March of 1976.

Brokers and traders were easily able to determine if the futures contract was cheap or expensive by looking at the relationship between the spot 90-day T-bill and the spot six-month T-bill. If futures were cheap, then there were arbitrage opportunities. Cheap futures also provided the most cost-effective way to go long, and the best way to invest anticipated cash flows three months from now. The user bought the futures and took delivery. If T-bill futures were expensive, then it also provided arbitrage opportunities, the best way for traders to go short and ...

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