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.
What exactly is a bond futures contract?
An option contract that offers the holder the right but not the duty to purchase or sell a bond future at a fixed price is known as a bond future option. The customer pays the writer/seller a premium for fulfilling this commitment.
Is there a difference between futures and bonds?
Bond futures are financial derivatives that bind the contract holder to buy or sell a bond at a predetermined price on a specific date. A bond futures contract is purchased or sold on a futures exchange market by a brokerage business that specializes in futures trading. The contract’s terms (price and expiration date) are decided when the future is purchased or sold.
What is the most cost-effective way to distribute a bond?
The phrase “cheapest to deliver” (CTD) refers to the cheapest security delivered to a long position in a futures contract to meet the contract’s requirements. It only applies to contracts that allow for the delivery of a variety of somewhat different securities. This is prevalent in Treasury bond futures contracts, which normally state that any Treasury bond can be delivered as long as it is within a specified maturity range and has a specified coupon rate. The coupon rate is the interest rate that a bond issuer pays over the life of the bond.
Do bond prices stay the same throughout time?
Bond pricing do not fluctuate over time. A bond issuer is required to pay interest on a regular basis. Bonds do not grant corporation ownership rights. A bond is a type of financial instrument.
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.
In the bond market, how much is one tick worth?
Rule 612, often 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 trade bonds like stocks?
- Unlike stock exchange-traded company shares, most corporate bonds are traded over-the-counter (OTC).
- This is because bonds are issued by a variety of companies, and each company will provide a variety of bonds, each having a distinct maturity, coupon, nominal value, and credit rating.
- In many situations, investors must rely on their brokers to arrange the purchase and sale of bonds because they are not listed on major markets.
- Because OTC markets are less regulated, transparent, and liquid than exchange-traded securities, transaction and counterparty risk is higher.
How are futures traded?
A futures contract is a contract to purchase or sell an item at a predetermined price at a future date. Soybeans, coffee, oil, individual stocks, ETFs, cryptocurrencies, and a variety of other assets could be used. Futures contracts are often traded on an exchange, with one side agreeing to buy a specific quantity of securities or commodities and take delivery on a specific date. The contract’s selling party agrees to provide it.
What are cryptocurrency futures?
A derivative trading product is a futures contract. These are regulated trading contracts in which two parties agree to buy or sell an underlying asset at a certain price on a specific date. The underlying asset in the case of bitcoin futures would be bitcoin.