10-yr T-note conversion factors are available from the Chicago Board of Trade. A
ID: 2712634 • Letter: 1
Question
10-yr T-note conversion factors are available from the Chicago Board of Trade. According to these conversion factors, the face value of the 2 3/4%, Feb 2024 that must be delivered to satisfy a Mar 2016 10-year treasury-note futures contract ($100,000 FV) is $
Using the conversion factors and Wall Street Journal published bond price bids for Fri Oct 30, 2015 determine the cost per dollar of credit for the March 2016 treasury note futures contract for each of these bonds
The cheapest to deliver contract is the 2 3/4%, Feb 2024 2 1/2%, May 2024 2%, Feb 2025 2%, Aug 2025 (Two items scored jointly.)
According to the conversion factor cross-hedging method, to hedge the anticipated Mar 2016 purchase of $ 17 million of the 2%, Aug 2025 one should be short / long short long Mar 2016 t-note futures contracts. (Two items scored jointly.)
The following table indicates the interest rate sensitivity of of bond and treasury note futures contract prices.
Based on these interest rate sensitivities, the hedge ratio for this bond is
Bond CBOT10-Year T-note
Conversion Factors Bid Prices (decimal) Cost/credit 2 3/4%, Feb 2024 0.8009 Fri Oct 30 bid = 2 1/2%, May 2024 Conv Factor = Fri Oct 30 bid = 2%, Feb 2025 Conv Factor = 98.875 2%, Aug 2025 0.7191 98.6719 1.37215825337227
Explanation / Answer
The only difference between a flexible budget based on a single cost driver and one based on two cost drivers is the cost formulas. When two cost drivers exist, some costs may be a function of the first cost driver, some costs may be a function of the second cost driver, and some costs may be a function of both cost drivers.
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