Business and Management
Submitted By jklychenyu
Introduction of European bond futures market- Part 1 and 2
Prof. Dr. Martin Hellmich (May 2013)
Akademische Programme Berufsbegleitende Programme Seminare Executive Education Firmenprogramme & Services Forschung Internationale Beratung
Some questions . . .
How is the forward value of a bond calculated? What is the conversion factor? What do I get on expiration of the bond future? What is the nature of the options that the seller of the future enjoys? What is the cheapest to deliver (CTD) bond? How is the CTD identified? Under what circumstances will the CTD change?
Forward pricing Contract Specification and Conversion Factors Futures Expiration Cheapest to Deliver Gross and Net Basis
Forward prices are driven by the concept of “cash and carry” Say that an institution asks for delivery of a bond in three months time but wants to fix a price today The price of this bond for forward delivery will be driven by the cost of hedging the transaction
Cash and carry
Buy the cash bond Hold it for a certain time period Pay repo interest on the financing of the position Earn coupon interest from the bond Deliver the bond against the short forward position
Clean cash price + Repo expense – Coupon income = The forward price of the bond
Theoretical forward price (OTC)
Forward clean price = Cash clean price + Net cost of carry
N FA SA FP = SP + (SA + SP) R 360
Forward Clean Cash Price Clean Price Repo Interest Paid Net Coupon Income Earned
Cost of carry
FP = Futures clean price FA = Accrued interest at forward settlement SP = Spot clean price
SA = Accrued interest at spot settlement R = Funding rate (in decimal) N = Holding period
Clean Price Cash Bond
If coupon income is greater than…...