Euribor Spread Betting
The Euribor represents the interbank lending rate used in the European financial zone, just as the LIBOR is the rate used in the UK for sterling lending. When you spread bet on it, the figures represent one hundred times {one hundred minus the rate in percent}. For example, if the interest rate is 2%, one hundred minus the rate is (100-2), which is 98, and one hundred times that is 9800. The current spread quote for a futures style bet three months away is 9879.5 – 9880.5. Working backwards, this is the same as saying the interest rate will be between 1.205% and 1.195%.
If you think that the interest rate is going up, you would place a short (sell) bet on the Euribor. Because of the calculation, when interest goes up the Euribor goes down, and vice versa. Say you bet £3.50 per point on a fall in price below 9879.5.
Suppose the rate changes to 9858.0 – 9859.0, and you decide to close your bet and take your profit. Here’s the calculation of how much you won: –
- Your sell bet was placed at 9879.5
- This bet closed at 9859.0
- The number of points you gained is 9879.5-9859.0
- This is 20.5 points
- As you bet £3.50 per point, your total gain is £71.75
if you are wrong in the direction that the price would move, you might have found the Euribor went up to 9886.5 – 9887.5, and that you had to close the bet and take the loss. You lost this much: –
- Your sell bet was placed at 9879.5
- Your bet closed at 9887.5
- The number of points you lost is 9887.5-9879.5
- This is eight points
- With a stake of £3.50 per point, you lost £28
There are several different future style bets available with IG Index. You can take out a bet on the Euribor for 12 months away, at a price of 9898.5 – 9899.5. This shows that generally the markets expect the Euribor will go up over time, that is equivalent to a reduction in the interbank lending rate of interest. If you agree, but think the interest rate will go down further than those figures anticipate, then you might want to take out a long bet on the Euribor, remembering that it goes in an opposite direction to the interest rate. Perhaps you stake £20 per point, at a value of 9899.5.
Even though this is a 12 month bet, you can cash it in at any time, so if you see in a few weeks that the price has gone up to 9954.0 – 9955.0, you can close your bet and figure out your winnings.
Your bet was placed at 9899.5, and closed at 9955.0. That means it went up 55.5 points. As you staked £20 per point, you made £1110.
Again you must consider that you may have bet in the wrong direction, and you need to accept your loss and get out of the trade quickly before it costs too much. Say it went down to 9879.0 – 9880.0, and you closed your bet.
In this case your bet was placed at 9899.5, and closed at 9879.0. This is a point difference of 20.5, which with your chosen stake costs you £410.
How to Spread Bet the Euribor
Like trading in the bond market, spread betting on the Euribor requires you to pay attention to what the numbers mean in relation to interest rates, but once you get the hang of it you may find that you like betting on this little frequented market. The market as a whole is popular, but until recently has not been spread traded by many users.
The Euribor is short for Euro Inter-Bank Offered Rate, and this has been the benchmark for the European common currency, the euro, since it was generally adopted in 1999. Just like the LIBOR it is a reference interest rate used for overnight loans between banks.
If you have tried trading in bonds and gilts, you will know that the value of these varies inversely with the interest rate, and the longer-term the bond the more the interest rate affects the price. As the Euribor is an overnight short-term interest rate, the effect of changes is immediate and direct, but requires explanation for the spread trader. The value on which you are spread trading is numerically 100 minus the interest rate, therefore when interest rates go up your bet goes down, and vice versa. Once again, an opposite effect to what you might expect.
An example will make it clearer. If the current interest rate is 2.5%, then the contract price is 97.5, which is 100 minus the rate. If the interest rate drops to 1.5%, then the contract price rises to 98.5, again 100 minus the rate. So the rate will always be just below 100 for all rational interest rates.
The effect of this is to invert the meaning of buying and selling with respect to interest rates. If you place a buy or long spread bet, which normally means you are betting on an increase in value, on Euribor, then you are betting that the interest rate will decrease. For a short or sell spread bet to be successful, you need the interest rate to increase.
If you’re interested in looking further into expectations for the Euribor, and not satisfied in simply performing technical analysis to detect the market sympathies, you may want to follow the meetings of the Governing Council of the European Central Bank. This Council is charged with making decisions on interest rates, and it meets every two weeks, usually on a Thursday. Studies have shown that these days usually exhibit greater volatility in the Euribor. In addition the ECB publishes M3 figures, basically summing up the money supply and banking deposits, towards the end of each month, and a monthly bulletin of other financial information in the second week of each month.
As you can see, the Euribor does not move much from the 97 – 99 range of values. To allow for sensible spread betting, the price is quoted with an additional two digits, such as 9858.0, so that the bets on a point move are a reasonable size. Working backwards, the value 9858.0 corresponds to an interest rate of 1.420%.
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