What is Bond Futures?
Bond Futures may be a contract that puts liability on the holder to get and sell a hard and fast amount of bonds as laid out in the contract agreement at a price which is predetermined by the contract holder where the opposite side is that the exchange. They are often bought and sold within the exchange market, the worth and dates are standardized at the time when an agreement is entered into by the holder.
What are Bond Futures Conversion Factors?
This contract allows the party with the short position to settle on to deliver any bond that features a maturity of quite 15 years and isn’t callable within 15 years
A factor is applicable at the time of delivery of a specific bond in exchange for the worth received by the short position for the bond. The applicable referred to price is that the product of the recent settlement price for the derivative instrument and therefore the factor.
Taking accrued interest under consideration, the cash received for every $100 face value of the bond delivered is:(Most Recent Settlement Price Conversion Factor) + Accrued Interest All approval is for the delivery of $100000 face value of bonds. Suppose that the foremost recent settlement price is 90-00, the factor for the bond delivered is 1.3800, and therefore the accrued interest on this bond at the time delivery is $3 per $100 face value. The money earned by the party with the short position is then(1.380090.00) +3 = $127.20 per $ 100 face value. a celebration with a short position is one contract that might deliver bonds with a face value of $10,000 and receive $127,200.
How to proceed Cheapest to deliver Bonds in Bond Futures Contact?
The party with the short position or the author of the bond chooses the bond that’s cheapest to deliver among a good sort of bond. And his decision is predicated on the below derivation :
(Most of the Recently Settlement Price * Conversion Factor) + Accrued interest interest
And the cost of buying the bond is,
Referred to Bond Price + Accrued Interest
The cheapest to deliver bond is one that below is that the least.
Referred to Bond Price – (Most Recent Settlement Price * Conversion Factor)
The number of things determines the most cost-effective to deliver the bond. If bond yields
reach 6%, the factor system enables the author to deliver long maturity low coupon bonds. When yields are below 6%, then high short-term coupon bonds
How the Bond Future is Priced?
One of the foremost popular bond futures is Treasury bond futures contracts traded by CME Group. In this, any bond that has quite 15 years to maturity on the primary day of the delivery month and isn’t callable within 15 years from that day are often delivered.
The 10, 5, and 2-year Treasury note futures contracts within us are prevalent
The future price for the Treasury bond is difficult to work out because the short party’s options are concerned with the timing of delivery and therefore the choice of the bond that’s delivered can’t be easily valued.