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Improving the Design of Treasury-Bond Futures Contracts

26 Pages Posted: 14 Oct 2005  

Rodolfo Oviedo

Universidad Austral; McGill University - Desautels Faculty of Management


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.

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

JEL Classification: G13, G23

Suggested Citation

Oviedo, Rodolfo, Improving the Design of Treasury-Bond Futures Contracts. Journal of Business, Vol. 79, No. 3, May 2006. Available at SSRN:

Rodolfo Oviedo (Contact Author)

Universidad Austral ( email )

Paraguay 1950
Rosario, Santa Fe S2000FZF
+45 341 522 3083 (Phone)
+45 341 522 3001 (Fax)


McGill University - Desautels Faculty of Management

Montreal, QC


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