Trading STIR Futures: An Introduction to Short-Term Interest Rate Futures

By Stephen Aikin

Harriman House Ltd.

268 pages, $54.40

The ever-expanding universe of short-term interest rate futures contracts in their various iterations and ways to trade them demands attention.

Aikin successfully mixes computation techniques for spread trading and theoretical pricing of STIR futures with discussion of the factors driving interest rate futures prices.

Although the book is introductory in nature, several areas are helpful for experienced traders as well. These include methods and techniques of spread trading, uses of zero-yield curves, and construction of arbitrage channels. Math is held to a minimum and valuation and trading strategies are explained clearly.

There are five main parts to the book: Basic valuation and pricing, mechanics of STIR futures markets, trading techniques and how STIRs relate to other interest-rate products, the trading decision process and the endgame conclusion a fictional day in the life of a trader and an interview with an established trader.

Aikin, with almost 20 years of experience trading STIR futures, is able to convey the sense of the marketplace. He became a member of the London International Financial Futures Exchange (Liffe) in 1987, trading the Euromark STIR futures contract. Since the advent of computerized trading he specializes in spread trading.

Trading techniques concentrate primarily within the nearest 12 quarters. As Aikin explains, these are the futures for which deposit rates may be used as the basis for estimating correct theoretical prices. For the longer-term, he recommends building zero yield curves based on swap rates.

The most thorough analysis in the book is reserved for the Short Sterling, Euribor and Eurodollar futures contracts. All are three-month deposits. In addition to intermarket spreads, Aikin shows that the large number of expiration dates is a great advantage in trading STIR futures because of the endless permutations of trading strategies.

Aikin suggests that traders consider their own personality team player or contrarian, risk-averse or risk-tolerant and adjust trading practices accordingly. This discussion leads to definitions of trigger points, and to a useful guide to technical indicators. The latter section includes calculations and rationales for numerous indicators.

This book is an invitation to further investigation of STIR trading and provides a good starting point. Aikin calls STIR futures the building blocks of finance. His book is the beginning of the structure.

Reviewed by Paul Cretien. Paul Cretien is a chartered financial analyst and an independent futures trader. E-mail: PaulDCretien@aol.com.

About the Author

Paul Cretien is an investment analyst and financial case writer. His e-mail is PaulDCretien@aol.com.