Introduction
A. Problem statement
Trading using the short term interest rates futures (STIRs) offers arbitrage opportunities to traders in financial markets. In the current research study, trading spreads will be used to explore the viability of the problem statement in reference to the STIR futures. This will be supplemented by research on the correlation and behaviour of different STIR spreads such as the b3 month Euribor, 3m Euro-Schatz futures and the TED-spread (the treasury/ Eurodollar spreads) in different phases of world economy. The phases that will be used in this particular research study are the period before subprime crisis, after subprime crisis and during the European sovereign debt crisis.
B. Background
1. Rationale of the study
The current financial crisis came about due to the subprime markets that started in US and later spread to Europe can best be explained through the trading spreads. This offers an opportunity to study the STIR futures spreads in the financial markets. Financial markets are fundamental as they play an integral part in an economy. The biggest financial markets in the worlds transact a lot of billions on a daily basis. The current financial crises have brought into attention what really goes on in a financial market. This has been necessitated by the fall in the housing markets in the US and Europe as a result of the subprime markets.
2. Significance
The current research study aims at providing a platform for institutions, individuals and banks to understand the potential opportunities with respect to STIRs futures. The importance of the dissertation is that it will give a clear understanding of the trading markets. Through the exploration of the trading STIR spreads, it will offer an opportunity to educate the people in the trading markets. Its analysis will give a theoretical understanding which can be used for educational purposes by students.
3. Need for the study
The study is essential as it will be in a position to address the current crisis in the financial markets as well as give a closer look at the importance of the STIRs. It will also help in analyzing the correlation and the behaviour between the Euribor, 3m Euro-Schatz futures and the TED-spread in three important phases in world economy.
C. Aim and Objectives of the dissertation research
The aim of the research paper is to explore the role played by Trading STIR futures spread in the financial markets. For the dissertation paper to achieve its aim the following dissertation objectives have been proposed:
- To explore the arbitrage opportunities availed by the trading in the STIRs futures.
- To determine the behaviour and the correlation that exists between the Euribor and 3m Euro-Schartz futures with the TED spreads.
- To critically analyze the essence of spread trading in relation to the current financial crisis in Europe and U.S.
Specific research question(s)
In the pursuit and the fulfillment of the research aims and objectives, the following research questions have been proposed.
- To explore the arbitrage opportunities availed by the trading in the STIRs futures.
- To determine the behaviour and the correlation that exists between the Euribor and 3m Euro-Schartz futures with the TED spreads.
- To critically analyze the essence of spread trading in relation to the current financial crisis in Europe and U.S.
References
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Aiken, S. 2006, Trading Stir Futures An Introduction to Short-term Interest Rate Futures. Harriman House Pub.
Dübel, H. 2007, US-Subprime Market Crisis– Structural Causes and Issues for Emerging European Mortgage Markets [Online] Available at: http://www.eubv2007.com/PRESENTATIONS/Duebel_En.pdf (accessed 13 December 2011)
Hester, E. L. 1995, Successful marketing research: the complete guide to getting and using essential information about your customers & competitors. New York, Wiley.
Labuszewski, J. W., & Richard. n.d, Eurodollar Futures: Interest rate market building blocks [Online] Available at: http://www.cmegroup.com/trading/interest-rates/files/Eurodollar_Futures_ Interest_Rate_Building_Blocks.pdf (accessed 13 December 2011)
Stangor. C. n.d, Psychologists Use Descriptive, Correlational, and Experimental Research Designs to Understand Behavior [Online] available at: http://www.flatworldknowledge.com/pub/introduction-psychology/67039#web-67039 (accessed 13 December 2011)
