Index provider Standard & Poor’s has announced the launch of the S&P Forward Interest Rate Arbitrage Index Series, which will allow investors to compare the effectiveness of int
Index provider Standard & Poor’s has announced the launch of the S&P Forward Interest Rate Arbitrage Index Series, which will allow investors to compare the effectiveness of interest-rate based investment strategies.
The new series, which will contain indices for seven countries at launch covering the most liquid G10 currencies, will measure strategies looking to exploit differences across the currencies and interest rates of these economies and serve as a benchmark for investment performance.
"Standard & Poor’s is the first independent index provider to offer access to forward interest rate arbitrage strategies and provide institutional investors the ability to benchmark the effectiveness of their managed currency allocations,’ says Steve Goldin, vice president, Standard & Poor’s Index Services. ‘In most interest rate markets, long-term interest rates tend to be higher than short term-interest rates. Since a long-term rate can be replicated by holding and rolling over a series of short-term rates, this implies that forward short term rates are generally priced at higher yields than equivalent spot short term rates."
Goldin says the series model the outcome of a strategy that seeks to profit from the commonly observed tendency for forward interest rates to be overstated by the spot yield curve.
At launch, it will contain indices for seven currencies that have an active interest rate futures contract, including the Australian Dollar Forward Arbitrage Index, the British Pound Forward Arbitrage Index, the Canadian Dollar Forward Arbitrage Index, the Euro Forward Arbitrage Index, the Japanese Yen Forward Arbitrage Index, the Swiss Franc Forward Arbitrage Index and the US Dollar Forward Arbitrage Index.
The indices roll on a quarterly basis in March, June, September and December, based on the settlement schedule of three month interest rate futures contracts.
The series is the most recent addition to the S&P Arbitrage Index Family, which seeks to model strategies attempting to exploit a number of systematic biases in the world’s financial markets.
