A Note on Interest Rate Futures

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Case Details:

Case Code : MISC011
Case Length : 15 Pages
Period : -
Pub Date : 2003
Teaching Note : Available
Organization : -
Industry : Banking & Financial Services
Countries : -

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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Excerpts Contd...

Treasury Bonds Futures

Treasury notes (maturity period of less than 10 years) and Treasury bonds (maturity period of more than 10 years but less than 30 years) form the market for long term interest rate futures (Refer Exhibit V characteristics of T-Notes and T-Bonds)...

Pricing of T-Bond Futures Contracts

For T-bond futures, it is up to the seller to decide which bond to deliver. Therefore he/she identifies the cheapest to deliver bond (Refer Exhibit VI). This is done by computing the cost of delivery for each deliverable bond as follows:

Cost = (Quoted Price + Accrued Interest) - (Quoted Futures Price X Conversion Factor + Accrued Interest).

Quoted Futures Price

Marketing Management Case Studies | Case Study in Management, Operations, Strategies, Marketing Management, Case Studies

A futures contract on a security that provides the holder with a known income is known as a Treasury bond futures contract. The assumption underlying the contract is that both the cheapest to deliver bond and the delivery date are known...

Conclusion

Futures are among the oldest financial instruments. This concept note attempts to help readers understand the applications of interest rate futures. Interest rate futures are used for hedging, spreading and arbitraging purposes...

Exhibits

Exhibit I: List of Actively Traded Short Term Interest Rate Futures
Exhibit II: List of Actively Traded Long Term Interest Rate Futures
Exhibit III: T-Bill Futures and Eurodollar Futures
Exhibit IV: No Arbitrage Futures Price
Exhibit V: Characteristics of T-Note and T-Bonds
Exhibit VI: Cheapest To Deliver Bond

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