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Key Financial Market Concepts, 2nd Edition by Bob Steiner

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Strip

Definition

A strip is the purchase or sale of a series of consecutive interest rate futures contracts or forward rate agreements (FRAs).

How is it used?

A futures contract typically covers a 3-month period. If a trader wishes to cover a period of, say, 6 months, 9 months or 12 months, he can use a series of consecutive contracts to cover the whole period. Each individual contract implies an interest rate for that 3-month period due at the end of that period (despite the fact that the mechanics of futures do not result in a payment at the end of the period). The implied interest rates for each futures contract period must therefore be compounded together to calculate the overall rate achieved.

A strip constructed in this way can be used ...

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