SHORTSTERLING

Short sterling is a short-term futures contract based on the British Bankers' Association's London Interbank Operating Rate (Libor) - the rate at which financial institutions can lend money to each other.

Libor is calculated as a reference for financial instruments and is as an average of the interbank lending rates for one day, one month, two months, six months, one year, etc. It is produced daily at 11:00 GMT and is typically slightly lower than the rates banks charge each other.

Available as a three-month sterling interest rate future on the NYSE Liffe London market, short sterling contracts minimise risk for investors and are payable at a specified time in the future.

Trading on short sterling contracts take place each day between 07:30 and 18:00, while trading ceases at 11:00 on the last trading day - the third Wednesday in every delivery month.

Minimum price movement is set at £0.01, with units of trading set as the interest rate on three-month deposits of £500,000. Delivery months are March, June, September and December, with two further serial months, while the delivery day is always the first day after the last day of trading.

Contract standard is set as cash settlement based on the exchange delivery settlement price - calculated as 100.00 minus Libor as rounded to three decimal places.

The future contract's uses include hedging against risk, as investors are able to use the inverse relationship between interest rates and bond prices to offset losses in either area.

For example, should interest rates go up over the course of the three-month contract, the owner will see the value of the future fall - due to its link to the underlying asset bond price. However, at this point, profits can be made by the investor by buying out the future.