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Interest Rate Futures: Options, Futures, and Other Derivatives, 7th International Edition, 1

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7 views14 pages

Interest Rate Futures: Options, Futures, and Other Derivatives, 7th International Edition, 1

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Uploaded by

Prachi Tamta
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© © All Rights Reserved
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Interest Rate Futures

Chapter 6

Options, Futures, and Other Derivatives, 7th International Edition,


Copyright © John C. Hull 2008 1
Day Count Conventions in the U.S.

Treasury Bonds: Actual/Actual (in


period)
Corporate Bonds: 30/360
Money Market Instruments: Actual/360

Options, Futures, and Other Derivatives, 7th International


Edition, Copyright © John C. Hull 2008 2
Example
1. Actual/actual
Bond principal is $100, coupon payment dates are
March 1 and Sep 1. Coupon rate is 8% per
annum. Suppose that we wish to calculate interest
between March 1 and July 3.
$4 coupon payments on Mar 1 and Sep 1
Reference period is Mar 1-Sep 1: 184 actual days
Nr. of days btw dates: Mar 1-July 1: 124 actual days
(124/184) x $4= 2.6957
2. 30/360
We assume 30 days in a month and 360 days
in a year.
Mar 1-Sep 1: 180 (6x30) days
Mar 1-July 3: (4x30)+2=122 days
(122/180)x4= 2.7111
Treasury Bond Price Quotes
in the U.S

Cash price = Quoted price +


Accrued Interest

Options, Futures, and Other Derivatives, 7th International


Edition, Copyright © John C. Hull 2008 5
Example
It is March 5, 2010, bond under the consideration is
an 11% coupon bond matring on July 10, 2018 with
a quoted price of 95-16 ($95.5). Coupons are paid
semiannually on government bonds recent coupon
date is Jan 10, 2010, next coupon date is July 10,
2010
Jan 10, 2010-Mar 5, 2010: 54 days
Jan 10, 2010-July 10, 2010: 181 days
(54/181)x $5.5 = $1.64
Cash price = 95.5+1.64= $97.14
Treasury Bond Futures

Cash price received by party with short


position =
Most recent settlement price × Conversion
factor + Accrued interest

Options, Futures, and Other Derivatives, 7th International


Edition, Copyright © John C. Hull 2008 7
Example
Most recent settlement price = 90.00
Conversion factor of bond delivered = 1.3800
Accrued interest on bond =3.00
Price received for bond is 1.3800×90.00+3.00
= $127.20
per $100 of principal
A party with short position in one contract
would deliver bonds with face value of $100
and receive $127.2.
Options, Futures, and Other Derivatives, 7th International
Edition, Copyright © John C. Hull 2008 8
Conversion Factor
The conversion factor for a bond is
approximately equal to the value of the bond
on the assumption that the yield curve is flat
at 6% with semiannual compounding

Options, Futures, and Other Derivatives, 7th International


Edition, Copyright © John C. Hull 2008 9
Example
10% coupon bond with 20 years and two months to
maturity: We assume that 20 years to maturity.

40
5 100

i 1 (1.03)
i

(1.03) 40
 $146.23

Conversion factor= 146.23/100=1.4623


Cheapest to Deliver Bond
It is the bond where;
quoted bond price - (Most recent settlement
price x conversion factor) is the least.
Example 6.1
The party with the short Bond Quoted Convers
position has desided to bond ion
deliver and is trying to price Factor
choose btw the ($)
following three bonds. 1 99.50 1.0382
Assume that the most
recent settlement price
is 93-03, or 93.25. Find 2 143.50 1.5188
the cheapest to deliver
bond.
3 119.75 1.2615
Determining the futures price
If we assume that both the cheapest-to-deliver
bond and the delivery date are known, the T-bond
futures contract is a futures contract on a traded
security (the bond) that provides the holder with
known income.

F0  ( S 0  I )e rT
Example 6.2
Suppose that in a T-bond futures contract, it is
known that the cheapest-to-deliver bond will be a
12% coupon bond with a conversion factor of
1.6000. Suppose also that it is known that delivey will
take place in 270 days. Coupons are payable
semiannually on the bond. The last coupon date was
60 days ago, the next coupon date is in 122 days,
and the coupon date thereafter is in 305 days. The
term structure is flat, and the rate of interest (with
cont. Compounding) is 10% per annum.
Assume that the current quoted bond price is $115.

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