Long position in an interest rate futures

[iamthenight]

when i take a long position in a FRA, i am looking to borrow funds at the specified rate in the FRA.
when i take a long position in an interest rate futures, what am i doing?
“Futures use the inverse relationship between interest rates and bond prices to hedge against the risk of rising interest rates. A borrower will enter to sell a future today. Then if interest rates rise in the future, the value of the future will fall (as it is linked to the underlying asset, bond prices), and hence a profit can be made when closing out of the future (i.e. buying the future).”
can someone explain this? thanks

 

[bizzle]

the underlying on an “interest rate future” is just a bond, so you’re really just buying a bond future. if interest rates fall, bond prices rise (so the future rises). if interest rates rise, bond prices fall (so the future falls).

 

[janakisri]

The borrower needs funds now. He is paying floating rate , so he will be exposed to interest rates . A rise in rates would cause him to pay more interst in the future periods than in the current period. To protect or hedge against this exposure , he has to take a short position in a security that will pay off when rates rise.
Shorting interest rate futures ( e.g. treasury bond futures ) would give him the short exposure he requires. If rates rise , his payment goes up , but the short futures contract pays off and covers the increased interest payments ( because the futures contract drops in market value, when rates increase , and he is short the contract )

 

[Straightjacket]

I think bizzle is correct on how an interest rate future works.
However, i don’t think that answers your question because i was confused by exactly the same thing as you.
I believe that an interest rate future does not in any way = FRA. A forward rate agreement is an agreement to pay a future rate. Interest rate futures are inversly related to bond value.
I think market convension came about in this way because otherwise, the market would be buying a future to hedge a bond instead of shorting a future which is the modus operandi to hedge other things. Possibly, it keeps things simpler and cleaner (but that’s just my amateur opinion).