Question

Go to the CME group website and read the introduction to financial futures. What are the specific contract terms for the T-bond contract? What is meant by the ‘cheapest to deliver’ bond? How does one determine which bond is cheapest to deliver? What are the ‘adjusted futures price’ and the ‘adjusted cash price?’

Answer 1

A financial future contract is an agreement to buy or sell an asset at a specified time at a specified price but futures are standardized contracts traded on unorganised exchange which guarantees performance marked to market daily supported by a margin account only rarely do buyers and sellers of future contracts accept or Make delivery most future contracts are offset by taking an opposite position.

Is future contract represent a specific amount of a given commodity or financial instrument the most widely traded commodity future contract for example is crude oil which has a contract unit of 1000 barrels. EA futures contract of corn on the other hand represent 5000 bushels.

Some future contracts call for physical delivery of the Asset while others are settled in cash in general most investors trade future contracts to hedge risk and speculate not to exchange physical commodities that's the primary activity of the cash or spot market.

Some future contracts call for physical delivery of the Asset while others are settled in cash in general most investors trade future contracts to hedge risk and speculate not to exchange physical commodities that's the primary activity of the cash or spot market. The future market is a major financial hub that supports intensive competition between buyers and sellers and it also provides a spot e to manage price risk it's an extremely liquid market that comprises of the most actively traded instruments in the world. In general future trading is considered riskier than buying and selling stocks primarily because of the leverage involved still futures are popular trading instruments among a variety of market participants Trump small retail traders to high frequency trading firms if you're considering trading in future markets it's important that you understand how the market works the future market is major financial hub that supports intense competition.

United state treasury futures and options provide a wide variety of market participants around the globe with the ability to adjust their interest rate exposure future and options on treasury bonds and notes are ki tools for those who wish to manage the interest rate risk as well as those who wish to take the advantage of price volatility among the most liquid products in the world treasury futures and options lend themselves to a variety of risk management and training applications including hedging income enhancement duration enhancement interest rate speculation and spread trades the availability of treasury futures and options enhances the efficiency of trading these products providing nearly 24 hour Access for users Around The World serial quickly treasury options provide more opportunity for market participants 11 flexibility in managing existing option position targeted trading based on market volatility and the ability to trade financial exposure to high impact economic events block trading is available for treasury futures and Markets

Cheapest to deliver in a future contract is the cheapest security that can be delivered to long position to satisfy the contract specification and is relevant only for contracts that allow a variety of slightly different securities to be delivered this is common in treasury Bond futures contracts which typically specify that any treasury Bond can be delivered so long as it is within a certain maturity range and has a certain coupon rate. Determine the cheapest to deliver security is important for short position because there is often a disparity between the market price of a security and the conversion factor used to determine the value of security been delivered this makes it advantages for the seller to pick a specific security to deliver over another since it is assumed that the short position will provide the cheapest to deliver security the market pricing of future contracts is generally based on the cheapest to deliver security. Selecting the cheapest to deliver provides the investor in the short position the ability to maximize his return or profit on the bond chosen the calculation to determine the cheapest to deliver is CDT = current Bond price minus settlement price* conversion factor the current Bond price is determined based on the current market rice with any interest due added to reach a total edition early the calculations are most commonly based on the net amount earned from the transaction also known as the implied repo rate higher implied Repo rates result in asset that are cheaper to deliver overall.

Adjusted future price the cash prize equivalent reflected in the current future prices this is calculated by taking the future price times the conversion factor for the particular financial instrument example Bond or not being delivered adjusted cash price is the equivalent reflected in the current future market.