Forwards and Futures - Hedging 3 by Edu Pristine

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Edu Pristine

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... expiry points. Because investors will always want to deliver the cheapest available underlying, the price of derivatives will always factor the CTD product. Necessity for Conversion Factor – By allowing several possible bonds to be delivered, the CBOT creates a large supply of the deliverable asset. This makes it practically impossible for a group of individuals who are long many T-bond futures contracts to “corner the market” by owning so many ...

... Eurodollar futures and FRA – In an FRA the payoff is equal to the difference in the forward interest rate and the realized interest rate. The settlement is at time T1 for the E-futures contract while its at time T2 for the ...

... auction in which the maximum purchase amount is $5 million if the bid is non-competitive or 35% of the offering if the bid is competitive. A competitive bidstates the rate that the bidder is willing to accept; it will be accepted depending on how it compares to the set rate of the bond. A non-competitive bid ensures that the bidder will get the bond but he or she will have to accept the set rate. After the auction, the bonds can be sold in the secondary market. The tick size is 0.03125% ...

... Where TMV is the total market value of portfolio of bonds to be hedged, FV = (zF/100) is the face value of one bond futures contract. S is the invoice spot/cash price of bond(s) to be hedged. F is the invoice price of the CTD bond in the futures contract. CFCTD is the conversion factor of the CTD ...

... 20 Eurodollar futures contracts for each of the three reset dates. What maturity contracts should the corporate use? The corporate could undertake a strip hedge, whereby on 4th December, it shorts 20 March contracts, 20 June contracts and 20 September contracts using 90-day Eurodollar contracts. The corporate closes out each of these contracts at the time the interest-rate resets occur. If interest rates rise, any profit from closing out the maturing futures contracts can be used to offset the higher interest payments payable on the bank loan. Hence, on 4th December, the corporate effectively locks in. The futures interest rates that apply ...