Abstract

http://ssrn.com/abstract=818111
 
 

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Improving the Design of Treasury-Bond Futures Contracts


Rodolfo Oviedo


Universidad Austral; McGill University - Desautels Faculty of Management


Journal of Business, Vol. 79, No. 3, May 2006

Abstract:     
In bond futures contracts, the seller can choose which bond to deliver from a basket of eligible issues. A Conversion Factor System is used by the CBOT and other exchanges in the world in order to adjust the futures invoice price according to the bond chosen for delivery. This system was designed with the objective of making the futures invoice prices for the different eligible bonds close to their corresponding spot market prices. However, the poor performance of this system in achieving this objective is very well known. In this paper, I propose an alternative method for computing futures invoice prices: the True Notional Bond System. I show that this method meets the aforesaid objective much better than the Conversion Factor System. In addition, it makes futures contracts more effective and easier to use as a tool for risk management.

Number of Pages in PDF File: 26

Keywords: Treasury, bond, futures, contracts, conversion, factor, CBOT

JEL Classification: G13, G23

Accepted Paper Series


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Date posted: October 14, 2005  

Suggested Citation

Oviedo, Rodolfo, Improving the Design of Treasury-Bond Futures Contracts. Journal of Business, Vol. 79, No. 3, May 2006. Available at SSRN: http://ssrn.com/abstract=818111

Contact Information

Rodolfo Oviedo (Contact Author)
Universidad Austral ( email )
Paraguay 1950
Rosario, Santa Fe S2000FZF
Argentina
+45 341 522 3083 (Phone)
+45 341 522 3001 (Fax)
HOME PAGE: http://web.austral.edu.ar/
McGill University - Desautels Faculty of Management
Montreal, QC
Canada
HOME PAGE: http://www.mcgill.ca/
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