Personal Finance & Money Asked by Rodrigo Livianu on August 20, 2021
How well do Treasury bond Futures correlate to their hypothetical underlying bond? If the price of the future is most tightly related to the current CTD, whose maturity varies widely, how can the general assumption be that this security tracks the 10Y rate for example?
To answer the second question: if I understand the contract spec correctly, I believe the value of the bond actually delivered on settlement is adjusted to account for variations in maturity.
Answered by padd13ear on August 20, 2021
Bond futures will deliver the cheapest bond from the basket of underlying bonds, so there is no guarantee that the future will deliver the 10Y bond. If the current Cheapest-To-Deliver (CTD) bond is the 10Y, and underyling interest rates (not coupon rates) for other tenors move up, then another bond may be cheaper at expiry and will be the bond that is delivered.
Answered by D Stanley on August 20, 2021
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