Derivatives

What is the calculated quoted futures price for a September 2022 Treasury bond futures
contract given that the date is July 30, 2022? The associated bond is a 13% coupon bond set
for delivery on September 30, 2022. The bond makes coupon payments twice a year,
specifically on February 4 and August 4. The interest rate, compounded semiannually, is a
steady 12% annually. The bond's conversion factor is 1.5, and the current quoted price for the
bond stands at $110.
A financial agreement for the purchase or sale of an asset at a fixed future time and price is known as
a future contract. These contracts are standardized and exchanged on established exchanges, giving
market participants a way to protect themselves against price volatility or make predictions about how
prices will change in the future.
The commitment to fulfill the contract conditions at the specified future date is one of the
essential features of the futures contract. Regardless of the underlying asset's current market price,
the contract obligates both the seller and the buyer to sell or purchase it.
Explanation:
Introduction of this example
First, determine the accrued interest by multiplying the coupon payment by the number of days.
Number of days since the last coupon payment = From August 4 to September 30 = 27 + 29 = 56
Number of days in coupon payment = From August 4 to February 4
= 28+30+31+30+31+31+4
= 185
Accrued interest = Coupon payment*Number of days since the last coupon payment / Number of
days in the coupon period = 6.5 *56/185 = 1.97
Now, determine the invoice price by adding the current quoted price to the accrued interest.
Invoice price = Current quoted price + Accrued interest = 110 + 1.97 = 111.97
Finally, determine the future price by multiplying the invoice price by the conversion factor by one plus
the semi-annual interest rate.
Future price = Invoice price * conversion factor * (1+ interest rate / 2)

= 111.97 *1.5*(1+.12/2)
178.03
Future price=$178.03
Explanation:
Hence, this is your required answer
Final answer
The quoted future price is $178.03
Denote xi and yi by the i-th observation on the change in the futures price and the change in the spot
price respectively.
Σxi = 0.96
Σyi = 1.30
Σxi2 = 2.4474
Σyi2 = 2.3594
Σxiyi = 2.352
An estimate of σF is √ (2.4474/9 - .96^2 / 10*9) = 0.5116
An estimate of σS is √ (2.3594/9 - 1.30^2 / 10*9) = 0.4933
An estimate of ρ is 10x2.352 - 0.96x1.30 / (√(10x2.4474 - 0.96^2)(10x2.3594-1.3062) = 0.981
The minimum variance hedge ratio is ρxσS / σF = 0.981x0.4933/0.5116 = 0.946

formulae plus print
When a known future cash outflow in a foreign currency is hedged by a company using a
forward contract, there is no foreign exchange risk. When it is hedged using futures contracts,
the daily settlement process does leave the company exposed to some risk. Explain the
nature of this risk. In particular, consider whether the company is better off using a futures
contract or a forward contract when
a. The value of the foreign currency falls and rises rapidly during the life of the contract (5
Marks)
b. The value of the foreign currency first rises or falls and then falls or rises back to its initial
value . Assume that the forward price equals the futures price. (5 Marks)
A futures contract's profit or loss is equivalent to that of an identical forward contract's profit or loss. In
any event, the plan for making money is an excellent example of clever strategy. Because of the
passage of time, it is possible that a futures contract will prove to be more profitable than a forward
contract, or vice versa. The organisation does not have any prior knowledge regarding either of these
possibilities. Long-term forward contracts offer the highest level of protection possible. At most, the
aid that is supplied by the extended prospect contract is merely adequate.
Step 2/2
In light of these facts, the forward contract provides a conclusion that is slightly more advantageous.
This assistance will only result in the group's existing difficulties becoming even more severe. When it
comes to a forward contract, the full scope of the error will be made public once the transaction has
been completed in its entirety. Every day up until the end of the contract, the calamity will be brought
up to see if it has any impact on the terms of the agreement with the client. According to the criteria
that are used in contemporary assessment, the antecedent is flawless.
In terms of the outcomes, the subsequent contract would be a marginally better choice. The
organisation is taking steps to broaden its audience. In the event that the contract is forward-looking
and includes a fence, the premium payment will be recognised during the later stages of the
transaction. If the transaction is a futures contract, the rise will be accounted for over the course of
the entire agreement.
The second option is the better choice from a financial standpoint at the moment.
The possibility of a deal would bring a slight improvement to the situation. This is due to the fact that
doing so would result in the incorporation of both positive and negative cash flows at various points in
time.
In light of these facts, the forward contract provides a conclusion that is slightly more advantageous.
This is due to the fact that the potential contract would guarantee revenue, despite the fact that the
initial cash flows would be negative.

Derivatives

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Derivatives

Uploaded by

Copyright:

Available Formats

What is the calculated quoted futures price for a September 2022 Treasury bond futures

Future price = Invoice price * conversion factor * (1+ interest rate / 2)

The minimum variance hedge ratio is ρxσS / σF = 0.981x0.4933/0.5116 = 0.946

You might also like