STIR Futures & Options

What Are STIR Futures & Options?

STIR is an acronym standing for "short-term interest rate," and options or futures contracts on these rates are referred to by institutional traders as STIR futures or STIR options. The categories of STIR derivatives include futures, options, and swaps.

Key Takeaways

  • Short-term interest rate (STIR) derivatives are most often based on three-month interest rate securities.
  • The primary use of these is to hedge against interest rate exposure in short-term lending.
  • Buyers or calls or futures on STIR securities are betting interest rates will rise, buyers of puts are betting interest rates will fall.

Understanding STIR Futures & Options

The underlying asset for STIR futures and options is a three-month interest rate security. The two main traded contracts are the Eurodollar and Euribor, which can trade over one trillion dollars and euros daily in a completely electronic marketplace.

The category also includes other short-term benchmarks, such as the ASX 90-day bank accepted bill in Australia and other short-term floating interest rates, such as the London Interbank Offered Rate (LIBOR) and its equivalents in Hong Kong (HIBOR), Tokyo (TIBOR), and other financial centers. Many companies and financial institutions use STIR contracts to hedge against borrowing or lending exposure.

While speculators may find trading STIR profitable, the most common use is for hedging with options strategies such as caps, floors, and collars. Central banks might watch STIR futures to gauge market expectations ahead of monetary policy decisions. Therefore, changes in STIR futures might be useful for those wishing to forecast that policy.

Using STIR Futures and Options

Anyone trading in the interest rate futures market has an opinion on whether rates will rise of fall during the short-life of the futures contract. As with any futures contract, the buyer believes that they can purchase the contract now and profit from an increase in price of the underlying asset when the contract expires. These futures settle in cash, so the profit or loss is simply the difference between the settlement or delivery price and the purchase price. This is different from some other futures contracts, such as futures on commodities, which settle with the physical delivery of the underlying asset by the seller to the buyer.

Other than specific contract sizes and minimum price fluctuations, there is very little difference between STIR futures and options and other standard futures and options. STIR is the short-term equivalent of "long-dated maturities" that merely describes a portion of the yield curve, albeit across markets (Eurodollars, LIBOR, etc.).

Trading in the most active STIR futures and options provides high efficiency, liquidity, and transparency for hedgers. This saves a company from having to create hedges from complicated strategies in the over-the-counter (OTC) market and from taking on counterparty risk.

STIR Contract Details

While each exchange sets its own contract specifications there are a few general rules. Expiration dates generally follow the International Monetary Market (IMM) dates of the third Wednesday of March, June, September, and December. Exceptions include Australian bills and New Zealand bills are notable exceptions. The ASX also features “serial” contracts that also expire on the third Wednesday of all contract months.

A STIR contract price is usually quoted as 100, minus a relevant three-month interest rate, so a rate of 2.5% yields a price of 97.50.

Article Sources

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  1. CME Group. "UNDERSTANDING STIR FUTURES - Introduction to STIR Futures." Accessed Dec. 13, 2021.

  2. Intercontinental Exchange, Inc. "ICE LIBOR." Accessed Dec. 13, 2021.

  3. Hong Kong Monetary Authority. "Reform of Interest Rate Benchmarks." Accessed Dec. 13, 2021.

  4. ASX. "ASX 90 Day Bank Accepted Bill Futures and Options." Accessed Dec. 13, 2021.

  5. Beets, S. (2004). The use of derivatives to manage interest rate risk in commercial banks. Investment management and financial innovations, (1, Iss. 2), 60-74.

  6. ASX. "Short-term derivatives." Accessed Dec. 13, 2021.

  7. ASX. "Expiry Calendar." Accessed Dec. 13, 2021.

  8. CME Group. "UNDERSTANDING STIR FUTURES - What is the Eurodollar Settlement Process (cash settled)." Accessed Dec. 13, 2021.

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