The Savings and Loan Industry: Current Problems and Possible Solutions

By Walter J. Woerheide | Go to book overview

5
Financial Futures and Forward Commitments

A financial instrument which has grown in popularity and sophistication in recent years and may be of substantial benefit to SLAs is the financial futures contract. Some SLAs have been dealing in forward contracts for years. Financial futures and forward contracts are both agreements made today for a transaction to be made in the future. They differ in that financial futures are contracts traded on organized exchanges with brokers acting on behalf of clients, and the contracts have standardized terms. A forward contract is negotiated between a buyer and seller, and the terms of the contract are tailored to their specific needs and desires. Because of aspects such as liquidity and monitoring costs, financial futures offer SLAs better opportunities to reduce their own interest rate risk exposure than do forward contracts. This advantage to SLAs has been recognized by the FHLBB, as indicated by their recent regulations on futures and options.


THE FINANCIAL FUTURES CONTRACT

A substantial number of financial futures contracts are currently traded on various exchanges. The more important ones for the thrift institutions are the Government National Mortgage Association (GNMA), Treasury bond (T-bond), Treasury note (T-note), and Treasury bill (T-bill) contracts. 1 There are actually two GNMA contracts. One is the GNMA CDR or Collateralized Depository Receipt and the other is the CD GNMA or Certificate Delivery GNMA. The larger volume occurs in the GNMA CDR contract? 2 Because the needs of institutions such as SLAs are best served in the markets with the largest volume, all subsequent discussion about GNMA contracts will concern the GNMA CDR contract. The CDR is a "document prepared, signed and dated by the Depository--an authorized bank--to verify that the Originator has placed in safekeeping $100,000 principal balance of GNMA 8s or the equivalent, on the date indicated." 34

A financial futures contract calls for delivery of the agreed upon principal value amount of a specified financial instrument at an agreed upon delivery date. As an example, a seller of a December GNMA CDR contract agrees to make delivery

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The Savings and Loan Industry: Current Problems and Possible Solutions
Table of contents

Table of contents

  • Title Page iii
  • Contents vii
  • Tables ix
  • Acknowledgments xi
  • Introduction xiii
  • Note xv
  • Abbreviations xvii
  • 1 - History of the Federal Home Loan Bank System 3
  • Notes 23
  • 2 - The Determinants of Profitability for Savings and Loans 28
  • 3 - Measuring the Interest Rate Risk Exposure of Savings and Loans 49
  • Notes 67
  • 4 - Alternative Mortgage Instruments 70
  • Notes 97
  • 5 - Financial Futures and Forward Commitments 104
  • Notes 121
  • 6 - Consumer Lending 124
  • Notes 135
  • 7 - The Elimination of Interest Rate Ceilings 138
  • Notes 148
  • 8 - The Introduction of Now Accounts 152
  • Notes 160
  • 9 - Mergers and Conversions 163
  • SUMMARY AND CONCLUSIONS 184
  • 10 - The Future 189
  • Notes 195
  • Bibliography 197
  • Index 211
  • About the Author 217
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