A bond futures contract allows a trader to speculate on the price movement of a bond and lock in a price for a specific period of time. If a trader buys a bond futures contract and the price of the bond rises and closes higher than the contract price at expiration, the trader makes a profit. At that point, the trader might either take delivery of the bond or unwind the position by offsetting the buy order with a sell deal, with the difference in prices being settled in cash.
What does the future hold for bonds?
A Bond Future is a contract that requires the contract holder to purchase or sell a Bond at a predetermined price on a specific date. The buyer of a Bond Future (long position) is obligated to purchase the underlying Bond at the agreed-upon price when the future expires. On the expiration of a Bond Future, the seller (short position) is required to deliver the underlying bond at the agreed price. Bond Futures Contracts on underlying government and corporate bonds are available on the JSE.
Who is this for?
- Bond Futures are used by hedgers to safeguard an existing portfolio from negative interest rate changes. Hedgers have a genuine interest in the underlying Spot Bonds, and they use Futures to protect their value.
- Arbitrageurs profit from price differences between comparable items in other marketplaces, such as the difference in price between Spot Bonds and Futures.
- Bond Futures are used by investors to boost the long-term performance of a portfolio of assets.
- Bond Futures are used by speculators in the hopes of profiting from short-term price changes.
Features
- Offer a way to have equivalent interest rate exposure to Spot Bonds at a fraction of the cost. Unless the future is held to expiry, you do not pay the principal or hold the actual Bond.
- Can be used to safeguard an existing portfolio from negative interest rate changes or to improve a portfolio’s long-term performance.
- Bond Futures are standardised contracts exchanged on a regulated exchange that lower both parties’ risk and enhance liquidity in the secondary market, making them simple to buy and sell.
- Allow investors to profit from price swings in Spot Bond prices by predicting whether the prices will rise or fall.
- Bond futures trading is dangerous since it entails trading at a future date with only current data. Because the price of the underlying Bond may change dramatically between the exercise date and the initial agreement, the risk is theoretically unlimited for either the buyer or seller of the Bond.
- The cash-futures basis is the difference between a security’s Cash (spot) and Futures prices. As the Bond Futures contract approaches expiration, the basis narrows. This is referred to as “basis convergence.” While futures trading can reduce price level risk, it cannot eliminate the risk that the basis will change in an unfavorable and unpredictable manner during the contract’s lifetime. It might be influenced by general market conditions or interest rate changes.
How do I get Bond Futures
Register as a client with a JSE Interest Rate and Currency Derivatives member, make the requisite first margin deposit, then sell or purchase as needed.
Qualifying factors
- Margining applies to futures contracts, which means you’ll have to pay a deposit up advance to protect both parties if one of them fails to fulfill their obligations. This margin, which is retained by the Exchange, earns interest every day.
To trade bond futures, how much money do you need?
Open an account with an online futures brokerage firm that specializes in Treasury futures trading. The minimum amount required to start an account is set by each broker, however all businesses must adhere to the exchange’s margin requirements. To trade one Treasury futures contract, you must deposit $1,500 to $3,000 to cover the initial margin and at least $1,500 to cover the maintenance margin. The amount required is determined by the underlying Treasury securities’ maturity date.
In the bond market, how much is one tick worth?
Rule 612, also known as the Sub-Penny Rule, was introduced by the Securities and Exchange Commission in 2005. Equities exceeding $1.00 must have a minimum tick size of $0.01, while stocks under $1.00 can be quoted in $0.0001 increments, according to Rule 612. Decimalization was the name for this procedure. The Securities and Exchange Commission (SEC) now compels all U.S. exchanges to use hundredths, which is why most equities now have a tick size of $0.01, or one cent, but it has lately experimented with bigger tick sizes for some less liquid securities.
Is it possible to day trade bonds?
To begin, you must first determine which stocks you will buy and sell. Bonds, options, futures, commodities, and currencies are all available for day trading, but stocks are the most popular because the market is large and busy, and commissions are minimal or nonexistent.
Are futures a high-risk investment?
Futures are no riskier than other types of assets such as stocks, bonds, or currencies in and of themselves. This is because the values of futures, whether they are futures on stocks, bonds, or currencies, are determined by the prices of the underlying assets.
Is it wise to invest in I bonds in 2020?
- I bonds are a smart cash investment since they are guaranteed and provide inflation-adjusted interest that is tax-deferred. After a year, they are also liquid.
- You can purchase up to $15,000 in I bonds per calendar year, in both electronic and paper form.
- I bonds earn interest and can be cashed in during retirement to ensure that you have secure, guaranteed investments.
- The term “interest” refers to a mix of a fixed rate and the rate of inflation. The interest rate for I bonds purchased between November 2021 and April 2022 was 7.12 percent.
Why are bonds falling in value?
It’s not merely a matter of selling equities and purchasing bonds when investors are concerned about the economy’s prospects. Stocks are significantly stronger than bonds at combating inflation over time, but bonds outperform when there is a risk-off sentiment. Fixed income is currently beating stocks because it is less negative on a relative basis.
Multiple narratives are at play in the marketplace right now, as they always are. However, the main reason bonds are down this year is that the Federal Reserve will be hiking interest rates.
What is a 30-year bond’s tick value?
The minimum tick size for the 30-year (T-Bond) and Ultra T-Bond contracts is 1/32nd of a point ($31.25), half of 1/32nd of a point ($15.625), quarter of 1/32nd of a point ($7.8125), and one-eighth of 1/32nd of a point ($7.8125).
Is it possible to trade futures without using leverage?
Trading in futures is, as we all know, quite similar to trading in the cash market. Futures, on the other hand, are leveraged because they merely require a margin payment. If the price change goes against you, however, you will have to pay mark to market (MTM) margins. Trading futures presents a significant difficulty in terms of minimizing leverage risk. What are the dangers of investing in futures rather than cash? What’s more, what are the risks of trading in the futures market? Is it possible to utilize efficient day trading futures strategies? Here are six key techniques to limit the danger of using leverage in futures trading.
Avoid using leverage just for the sake of using it. What exactly do we mean when we say this? Assume you have a savings account with a balance of Rs.2.50 lakhs. You want to invest the funds in SBI stocks. In the cash market, you can buy roughly 1000 shares at the current market price of Rs.250. Your broker, on the other hand, claims that you can purchase more SBI if you buy futures and pay a margin. Should you invest in futures with a notional value of Rs.2.50 lakh or futures with a margin of Rs.2.50 lakh? You can acquire the equivalent of 5000 shares of SBI if you buy it with a margin of Rs.2.5 lakh. That implies your profits could rise fivefold, but your losses could also rise fivefold. What is a middle-of-the-road strategy?
That brings us to the second phase, which is deciding how many SBI futures to buy. Because your available capital is Rs.2.50 lakh, you’ll need to account for mark-to-market margins as well. Let’s say you predict the shares of SBI to have a 30% corpus risk in the worst-case scenario. That means you’ll need Rs.75,000 set aside solely for MTM margins. If you want to roll over the futures for a longer length of time, you must throw in a monthly rollover cost of approximately 1%. So, if you wish to extend your loan for another six months, you’ll have to pay an additional Rs.15,000 to do so. Additional Rs.10,000 can be provided for exceptional volatility margins. Effectively, you should set aside Rs.1 lakh and spend only Rs.1.50 lakhs as an initial margin allowance. That would be a better way to go about calculating your initial margins.
You can hedge your futures position by adding a put or call option, depending on whether you’re holding futures of volatile equities or expecting market volatility to rise dramatically. You may ensure that your MTM risk on futures is largely offset by earnings on the options hedge this manner. Remember that buying options has a sunk cost, which you should consider carefully after considering the strategy’s risks and rewards.
Use rigorous stop losses while trading futures. This is a fundamental rule in any trading activity, but it will ensure that you exit losing positions quickly. Is it feasible that the stock will finally meet my target after I set the stop loss? That is entirely feasible. However, as a futures trader, your primary goal is to keep your money safe. Simply exit your position when the stop loss is triggered. That’s because if you don’t employ a stop loss, you’ll end up losing money.
At regular intervals, book profits on your futures position. Why are we doing this? It ensures that your liquidity is preserved, and it adds to your corpus each time you book gains. This means you’ll be able to get more leverage out of the market. Because you’re in a leveraged position, it’s just as crucial to keep your trading losses to a minimum as it is to maintain your trading winnings to a minimum.
Last but not least, keep your exposure from becoming too concentrated. If all of your futures positions are in rate-sensitive industries, a rate hike by the RBI could have a boomerang impact on your trading positions. To ensure that the impact of unfavorable news flows does not become too prohibitive, it is always advisable to spread out your leveraged positions. It has an average angle as well. When we buy futures and the price of the futures drops, we usually average our positions. Again, this is risky since you risk overexposure to a certain business or theme.
Leverage is an integral aspect of futures trading. How you manage the risk of leverage in futures is entirely up to you.