BondFutures
BOND FUTURES
1.Terminology (2)
2.Application (11)
1. Terminology
A future is a contract to either ll or buy a certain underlying on a specified future date at a fixed rate. It is traded on the exchange. For the long-term, usually the underlyings are one (or more) specific government bonds.
Since different futures on the different markets have different names (EUR-Bund future, US treasury bond future, etc.) we will u bund future as a synonym for a future on a medium- / long-term bond.
Underlying
The underlying of a bond future is a synthetic bond with a defined term and defined coupon. The advantage of this synthetic bond over an actual bond is that the futures price can be better compared over time.
The underlying of a EUR-Bund future is a synthetic Bund with a 10-
year term and a 6 % coupon. The T-bond (note) futures‘ underlying
specification is 30 (10) years and 6 % coupon.
Contract size
The contract size is determined individually by the futures exchange. In ca of a Euro-Bund future the contract size is EUR 100,000.
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Table: Contract sizes and Conventions
Currency Exchange Future Contract
size Underlying Deliverable
followingbonds (TOM in
years) *)
EUR EUR EUR EUR GBP JPY JPY JPY CHF USD USD USD USD EUREX
EUREX
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EUREX
LIFFE
LIFFE
TSE
TSE
TSE
tugboatEUREX
CBOT
CBOT
CBOT
CBOT
Bund-Future Schatz-Future Long-Gilt Future BOBL-Future Bund-Future JGB - Future JGB - Future JGB - Future CONF – Future 10-y T-Note
5-y T-Note
2-y T-Note
T-Bond Future 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 200,000 100,000 Bund, 10y. 6 % Bund, 5y., 6 % Bund, 2y., 6 % Bund, 10y., 6 % Long Gilt, 7 %
JGB, 20y., 6 %
JGB, 10y. , 6
JGB, 5 y., 6 %
Swiss Gvt. Bond, 10y., 6 %
T-note, 10 y.,6 %
T-note, 5 y.,6 %
T-note, 2 y., 6 %
T-bond, 30 y., 6 %
8.5 – 10.5
3.5 – 5
1,75 – 2,25
extra8,5 – 10,5
8,75 –13
15 – 21
7 – 11
4 - 5,25
8 – 13
6,5 – 10
1,75 – 5,25
4,25 – 5,15
min. 15
*) TOM = term to maturity
Futures purcha
The buyer of a Bund future is obliged to buy the underlying bond at a fixed price on an agreed date. Becau the prices of bonds ri when interest rates fall, a purchad future can be ud to speculate on falling interest rates.
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Futures ll
The ller of a bund future is obliged to deliver the underlying bond at a fixed price on an agreed date. Becau the prices of bonds fall when interest rates ri, a sold future can be ud to speculate on rising interest rates or to cure existing short positions against rising interest rates.
Tick
As with MM – Futures, a tick is the minimum price movement of a futures contract. In contrast to Money Market Futures where a tick is typically one hundredth of 1 % or at least in decimals, long-term futures sometimes move in 1/32 of 1 % (i.e.
0,0003125 or 3,125 BP),
< T-bond futures. The tick size is typically defined according to the quoting conventions of the underlying bond. For example, EUR-Bunds are quoted in decimals on 1 BP, thus the tick value of the Bund-Future is 1 BP.
A tick has always an exactly defined value in relation to the contract, the tick value is the product of the contract value times the basis points of a tick (=tick size).
The tick value of a EUR – Bund Future and a 10-y T-note Future respectively are:
EUR-Bund Future: 100,000 x 0.0001 = EUR 10
10-year T-note Future: 100,000 x 0.00015625 = USD 15.625
Tick table:
Currency Exchange Future Tick size Tick value EURO EURO EURO EURO GBP JPY CHF USD USD USD USD EUREX EUREX EUREX LIFFE LIFFE TSE EUREX CBOT CBOT CBOT CBOT
Bund-Future BOBL-Future Schatz-Future Bund-Future Long-Gilt Future JGB - Futures CONF – Future 10-y T-Note Future 5-y T-Note Future 2-y T-Note Future T-Bond Future
1 BP 1 BP 1 BP 1 BP 1 BP 1 BP 1 BP 1 / 64 BP 1 / 64 BP 1 / 128 BP 1 / 3
2 BP
EUR 10 EUR 10 EUR 10 EUR 10 GBP 10 JPY 10,000 CHF 10 USD 15.625 USD 15.625 USD 15.625 USD 31.25 Exchange Delivery Settlement Price (EDSP)
Usually, the EDSP is a volume-weighted average of a certain number of prices that have been ultimately dealt at the end of the trading day.
The EDSP of a Bund-Future is the volume-weighted average of the latest 10 trading prices quoted during the last 30 minutes of the trading day. If the number of trades in the last minute of the trading day exceeds the number of 10, the EDSP is calculated as weighted average of all deals undertaken during the last minute.
Delivery dates and last trading day
In contrast to MM-Futures the delivery of bond futures is not standardid across the markets.
The delivery months of bond futures are March, June, September and December (such as with MM-Futures). For the delivery day, futures exchanges t the following rules:
Currency Exchange Future Delivery day
EUR EUR EUR EUR GBP JPY CHF USD USD USD USD EUREX
EUREX
EUREX
LIFFE
LIFFE
TSE
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CBOT
CBOT
CBOT
CBOT
Bund-Future
BOBL-Future
leonardcohenSchatz-Future
Bund-Future
Long-Gilt Future
JGB - Futures
CONF – Future
10-y T-Note Future
5-y T-Note Future
2-y T-Note Future
T-Bond Future
10th day in the delivery month
10th day in the delivery month
10th day in the delivery month
10th day in the delivery month
Any business day in delivery month (at ller’s choice)
20th day in the delivery month *)
10th day in the delivery month
Last business day of the month *)
Last business day of the month *)
Third business day following the last trading day +)英语就业前景
Last business day of the month *)
*) The last trading day is 7 days before the last delivery day
+) The last trading day is the earlier of the cond business day prior to the issue day of the 2-year note auctioned in the current month or the last business day of the calendar month
If not mentioned otherwi, the last trading day is two days prior to delivery date. If the last trading day is a holiday the following business day is the last trading day.
Delivery
Contrary to MM-Futures, bond futures are delivered physically if they have not been clod out prior
to delivery date. The delivery of the futures contract must tackle the problem that the underlying bond is a synthetic instrument. Therefore, the ller can deliver from a basket of bonds. The ttlement price is determined by means of a conversion factor (or price factor) that makes the price of the synthetic bond comparable to the price of the deliverable bond.
The conversion factor is calculated on the basis of the clean price of the bond. The prent value of the deliverable bond is divided by the prent value of the synthetic bond (= 100). The prent value of the deliverable bond is calculated with a yield equal to the coupon of
the synthetic bond, e.g. 6 % for the EUR – Bund Future. The price is determined with the classic bond formula, assuming a flat yield curve.
100
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