Euro-Bund futures contract

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. 

The portfolio is valued at 100,000,000 and has been constructed to track a bond index for which the Euro-Bund Future is a very good hedge instrument. The basis point value (BPV) of the Euro-Bund futures contract is 72.03 and the yield is 5.595% calculated on an annual 360-day year basis. The bond index, which the portfolio has been designed to track, is quoted at 117.80. 

As mentioned in the introduction of this chapter, the option on the Euro-Bund futures is an extremely popular contract. Exhibit 18.1 presented an example of the contract specification drawn from a Bloomberg screen. Exercise of these options entails taking a position in an underlying Euro-Bund Futures contract which will involve taking or making delivery of a physical bond should the futures contract be held until maturity. 

As an alternative to Eurex s 10-year Euro-Bund future, Euronext LIFFE offers a similar contract again based on a nominal 100,000 contract size, tick value of 10, and the same expiry cycle. The Euro-Schatz counterpart, however, offers a contract size of 200,000. The smallest allowable price movement is one half of a basis point and hence the value of a tick remains at 10. 

The contract specification of the Euro-Bund bond future introduces a concept of a notional bond. This is also true for all other bond futures contracts. For example, in the case of the UK gilt, the description of the futures contract bond is a 10-year gilt with a 7% coupon for the Euro-Bund future it is a 10-year German government bond with a 6% coupon the Spanish bond (bonos) future is a Spanish Government bond with a 4% coupon, and so on. 

Dividing this by the BPV of the Euro-Bund future will determine the number of contracts to short ... 

The above examples have focused on the use of the Euro-Bund future as a vehicle for achieving a particular bond portfolio exposure. As indicated earlier, there are several other futures contracts available in the European arena and these could be used in the same way as described above. The futures contracts could also be used to alter the maturity characteristics of the portfolio by using, for example, futures contracts constructed around shorter or longer dated instruments than those currently held in the portfolio. The fact that the contracts can be bought or sold on margin, that the major contracts are liquid and span the European markets, and their flexibility of use make them essential financial market instruments. 

Options on Euro-BUND futures (OGBL). The BUND future is a contract on a notional long-term instrument issued by the German Federal Government with a remaining time to maturity between 8.5 and 10.5 years, bearing a 6% coupon. 

At the time, the June 2003 Euro-BUND future is trading at 116.42, and the cheapest-to-deliver (CTD) bond for the June 2003 futures contract is the 5% bond maturing on 4 January 2012, and having a conversion factor of 0.9341. The PVBP (or DVOl) for the CTD bond is 0.0788, while that for the bond actually held is 0.0840. The hedge ratio for the bond portfolio is therefore... 

Options on Euro-BOBL futures (OGBM). The BOBL future is exactly like the BUND, except that the remaining maturity of the German Government bond is between 4.5 and 5.5 years, and is therefore a medium-term contract. 

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