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FRM - Schweser - Topic 27
Interest rate futures
15
Finance
Professional
03/21/2010

Additional Finance Flashcards

 


 

Cards

Term
When do day count conventions matter?
Definition
when computing the interest that accrues on a fixed income security. When a bond is purcahsed, the buyer must pay any accured interest earned through the settlement date.
Term
How do you calculate accrued interest?
Definition
Accrued interest = coupon * (#days from last coupon to the settlement date/#days in coupon period)
Term
Describe the commonly used day count conventions and the markets each is typically used in:
Definition

1 - actual/actual - used for US Treasury bonds

 

2 - 30/360 - used for US corporate and municipal bonds

 

3 - actual/360 - used for US money market instruments

Term

Suppose there is a semi-annual-pay bond with a $100 par value.

 

Coupons are paid on March 1 and September 1 of each year.

 

Annual coupon = 6%. It is currently July 13.

 

Computer the accrued interest of this bond as a T-Bond and a US corporate bond.

Definition

Accrued interest formula = coupon * (#days from last coupon to the settlement date / #days in coupon period)

 

T-bond uses actual/actual

US corporate bond uses 30/360

 

For answer see pay 71

Term

How are T-bond price quoted?

 

How many dollars is 95-05 equal to?

Definition

T-bond prices are quoted relative to a $100 par amount in dollars and 32nds.

95-05 is 95+5/32 = 95.15625

Term
The quoted price of a T-bond is not the same as the cash price that is actually paid to the owner of the bond... what is the cash price equal to?
Definition
cash price = quoted price + accrued interest
Term

Define dirty price:

 

Define clean price:

Definition

Dirty price = the price that the seller of the bond must be paid. = quoted price + accrued interest.

 

Clean price = cash price (dirty price) - accrued interest

Term
Add a card for AIM 27.2 (p72)
Definition
to do
Term
Describe the US Treasury bond futures contract conversion factor:
Definition

The short can deliver ANY government bond with maturity > 15 years.

 

Since the different bonds have very different market values the CBOT has created conversion factors. The conversion factor defines the price received by the short position of the contract.

 

cash received = (quoted futures price * conversion factor) + accrued interest.

 

Why? If the short needed to deliver a specific bond there could be a run on the specific bond required.

 

WHY? 

Term
What is the cheapest to deliver bond?
Definition

it's the bond that minimises the following equation:

 

quoted bond price - (quoted futures price * conversion factor)

Term
Calculate the final contract price on a eurodollar futures contract?
Definition

The eurodollar enables investors to lock in libor rates.

 

eurodollar futures price = 10,000 [100-(0.25)(100-quoted price)]

 

quote = 1 - (annualised libor rate)

 

 

Term
Describe and compute the eurodollars futures contract convexity adjustment:
Definition

actual forward rate = forward rate implied by futures - (.5 * variation of the change in the rate, i.e. libor * T1 (the maturity) * T2 (maturity + 90 days.

 

TIP: forward rate should be smaller than futures as as forward doesn't have the daily settlement and thus doesn't have the increased volatility due to the daily settlement

Term
What's the objective of a duration based hedge and how do you calculate it?
Definition

the objective is to create a combined position that does not change in value when yields change by a small amount.

 

Number of contracts to hedge = (P * DP) / (F * DF)

 

P = portfolio hedge horizon value

DP = duration of the portfolio at the hedging horizon

F = futures position contract value

DF = duration of the futures contract

Term

Question:

 

6 month hedging horizon

portfolio value 100,000,000

6 month t-bond contract: 105-09

contract size: 100,000

duration portfolio = 10

duration futures = 12

 

outline the appropriate hedge for small chagnes in yield

Definition
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