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.
What is the difference between bond futures and interest rate futures?
Investors who hold a long position in a bond can also employ interest rate futures. The prospect of rising interest rates is a concern for these investors. The value of bonds will decrease as interest rates rise. Bond futures contracts use bonds as the underlying asset, thus when interest rates rise, their value will decline as well. Investors who are concerned about interest rate hikes can sell interest rate futures to offset the value loss of their bonds.
the rate of interest Futures can also be used to evaluate interest rate market sentiment. If investors expect interest rates will fall, futures contracts will adjust their prices to reflect this. If there is one,
What are bond futures for 30 years?
30-year bond futures are a type of financial commodity futures in which the contract holder agrees to buy or sell a bond at a predetermined price on a specific date. Bond contracts are standardized and supervised by a regulatory organization to ensure consistency and equity. Fixed income market players who want to align assets to future liabilities have historically preferred the 30-year bond. It is used as a benchmark against which other long-term securities are measured.
What is the meaning of US Treasury bond futures?
INTRODUCTION. CBOT Treasury futures are standardized contracts for the buying and sale of future delivery U.S. government notes and bonds. Among all government bond markets around the world, the US government bond market has the most liquidity, security (in terms of credit worthiness), and diversity.
Bond futures pay interest, right?
The factor (which varies every contract month, or every March, June, September, and December) for delivering the Feb. 15, 2015, 11.25 percent-coupon bond against the September futures contract is 1.2832, as shown in the table.
Crunching the Numbers
This leads us to the relationship between the cash bond price and the futures price, which is expressed as an equation. It goes like this:
The basis is the premium an investor would pay for a cash bond over a futures contract, as shown in the equation. Why would an investor prefer to buy a cash bond over a contract? Because it is a bond, the cash bond pays interest. A futures contract is simply that: a contract. It is not remunerated in any way.
Unfortunately, the situation is a little more complicated. The base does not merely represent the coupon income that a cash bond holder would receive until delivery. It is the difference between the coupon revenue and the cost of financing a cash bond position at an overnight interest rate for the investor. The difference is referred to as the cost of carrying. The majority of the base is made up of cost of carry. The remainder is the value of the futures seller’s delivery options.
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.
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.
Are bonds and futures the same thing?
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.
Treasury bonds were issued by WHO?
Treasury securities (“Treasuries”) are issued by the federal government and are considered to be among the safest investments available since they are guaranteed by the US government’s “full faith and credit.” This means that no matter what happensrecession, inflation, or warthe US government will protect its bondholders.
Treasuries are a liquid asset as well. Every time there is an auction, a group of more than 20 main dealers is required to buy substantial quantities of Treasuries and be ready to trade them in the secondary market.
There are other characteristics of Treasuries that appeal to individual investors. They are available in $100 denominations, making them inexpensive, and the purchasing process is simple. Treasury bonds can be purchased through brokerage firms and banks, or by following the instructions on the TreasuryDirect website.
What’s the deal with bond options?
A bond call option is a contract that gives the holder the right to purchase a bond at a predetermined price by a certain date. A buyer of a bond call option in the secondary market anticipates a drop in interest rates and an increase in bond prices. The investor may exercise his entitlement to buy the bonds if interest rates fall. (Keep in mind that bond prices and interest rates have an inverse relationshipprices rise when interest rates fall and vice versa.)