The structure of prices between the futures and cash markets for 90-day Treasury bills

With the inception of futures trading in thirteen-week Treasury bills, market participants have the opportunity to buy or sell Treasury bills for future delivery at prices specified in the current period. Ninety-day bills issues in the cash market each week by the U.S. Treasury represent the only financial instrument deliverable on the contract;Given this unique institutional arrangement, an understanding of the structural price relationship between the futures and cash markets becomes important for economic planning and policy making. For example, futures prices quoted on the International Monetary Market provide information regarding the market's expectations of prices and interest rates that will prevail in future periods. If it can be established that these expectations are both accurate and unbiased, then the value of this information for use in estimating deposit flows, credit demand and other such economic projections will be greatly enhanced;Public policy must also be concerned with the effect that speculation in the futures market has on the cash market and consequently, on the Treasury's ability to manage the Nation's debt. If arbitrage between the two markets results in a well-defined link between futures and cash prices, then the effects of speculation, whether they be stabilizing or otherwise, will be directly transmitted to the cash market;In both of the above cases, a complete knowledge of the price structure between the two markets is essential to an accurate assessment of the benefits and costs of futures trading and its effect on the cash market. This study is a theoretical and empirical analysis of the structure of prices between the futures and cash markets for 90-day Treasury bills.