Bonds future deliverability

The degree of this dearness will depend, among other factors, on the outstanding amount of the bond, the open interest of the future, bond market volatility, and that bond s supply dynamics. As discussed next, the Eurex victory in the Eurozone battle of the futures has made the German deliverable (and CTD) bonds trade richer than the other German and Euro bonds in their respective maturities. 

The action undertaken by the portfolio manager is then as follows. Assume that the cash market bond held in the portfolio is deliverable into a futures contract and is a natural candidate for hedging using the Euro-Bund futures contract on Eurex-Deutschland. The contract specification appears in Exhibit 16.6. 

In other words the 7% gilt, the 6% Bund, and the 4% bonos around which the futures contracts are constructed do not exist. A cash market bond that can be delivered into the contract on maturity has to be identified and converted to match the futures contract specification. In full exchange-based contract specifications, the list of deliverable cash market bonds are well defined and are restrictive. Deliverable bonds in the case of the Bund future will be bonds issued by the Federal Government of Germany and will have a maturity between 8.5 and 10.5 years. Normally, bonds offering early redemption, floating coupons, or some form of convertibility will not be in the list of deliverables. 

The conversion factor equalizes each deliverable bond to the futures price. The bond with the lowest gross basis is known as the cheapest to deliver. 

For that deliverance, thankfulness extends beyond Horace Mann Bond s family, to all those interested in America s past, present, and future. 

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