Intermarket Spreads

An intermarket spread consists of a long position in one market and a short position in another market trading the same or a closely related commodity. An example is the "TED" spread--the difference between the prices of a U.S. Treasury-bill futures contract and a Eurodollar time-deposit futures contract--on the Chicago Mercantile Exchange. The TED spread changes with changes in the relationship between short-term interest rates for private and government debt. Another intermarket spread is the "NOB" spread, or U.S. Treasury notes over U.S. Treasury bonds, on the Chicago Board of Trade. This spread reflects the difference in interest rates on U.S. Treasury securities of different maturities. Other intermarket spreads include gold and silver as well as platinum and palladium.

Examples of intermarket spreads on different exchanges are light sweet crude oil futures at the New York Mercantile Exchange and Brent crude oil futures on the International Petroleum Exchange or wheat contracts traded on the Chicago Board of Trade and the Kansas City Board of Trade. Intermarket spreads often involve different grades or specifications of a commodity, thereby introducing additional basis risk.

Also included among intermarket spreads are commodity-products spreads, which comprise a long position in a commodity against short positions of an equivalent amount of the products derived from the commodity, or vice versa. Examples are the soybean crush and the petroleum crack spreads. A crush spread involves a long soybean futures position, representing the raw, unprocessed beans, against short positions in soybean meal and soybean oil futures. The petroleum crack spread involves purchasing crude oil futures and selling the products--heating oil and/or unleaded gasoline futures.

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