What is a BAX Contract?
A BAX contract is a short-term investment instrument that tracks the nominal value of a Canadian bankers' acceptance (BA). The specific BA behind the contract has a nominal value of C$1 million and a maturity of 90 days. They were first sent off in 1988 by the Montreal Exchange and has since gotten some forward momentum from futures traders. Today, investors can in any case find the contracts trading on the Montreal Exchange. Another name for a BAX contract is a "bankers' acceptance contract."
Figuring out BAX Contracts
A BAX contract is a great way for a company or investor to hedge against increasing interest rates. They are frequently thought to be more affordable, more liquid and adaptable than comparative over-the-counter products and forward rate agreements (FRA). The contract is traded on an index basis and settled in cash in March, June, September, and December. These dates line up with delivery dates of Eurodollar futures contracts traded on the Chicago Mercantile Exchange (CME), which likewise sets out a potential arbitrage freedom between the BAX and the Eurodollar futures markets.
Prices are quoted by subtracting the annualized yield of a three-month Canadian bankers' acceptance from 100. For instance, September contracts offered at 95.20 on the floor of the exchange would infer a 4.80% (100 - 95.2) annual yield for the note.
Anytime, there are eight contracts with distinct delivery dates listed for trading on the Montreal Exchange. Each contract is recognized by its delivery month: the main contract lapses the earliest, while the last closes on a later date. Like other futures markets, the main BAX is more widely followed than fresher contracts lapsing sometime in the not too distant future and therefore more liquid. This is predictable with a smaller spread among bid and ask prices than outstanding contracts.
Hedging with BAX Contracts
BAX contracts are frequently utilized for eliminating or decreasing interest rate exposure in the money market at a given point in time. The holders can hedge against an anticipated rate climb by selling BAX contracts when the market prepares for a dubious stretch. When the situation balances out, the investors can close out the position for profits on the BAX position that offset losses on other assets.
Furthermore, BAX contracts act as a great commendation to a traditional forward rate agreement for hedging exposure to interest rate movement. The investors can limit lumps of chance by purchasing a forward rate agreement and hedge against the other portion by selling BAX contracts.