Now, let\'s revisit the futures contract written on Treasury bonds. Suppose that

Question

Now, let's revisit the futures contract written on Treasury bonds. Suppose that on March 1, 2013, a person agreed to buy a 10-year Treasury bond with coupon rate ??at a price of $92.50 on August 26, 2013. How? would you value this futures contract today on April 1, 2013? Give an example assuming some numbers about the future spot price of the futures. Consider a forward contract in which one counterparty agrees to purchase c a future date T a Treasury bond with coupon rate c and with maturity T > T. Let T fn = T be the coupon dates after T. The value of the forward contract for even v fwd(t) = Z(t. T) Times[Pc -pc fwd(Q X. T ) is the delivery price agreed upon at initiation

Explanation / Answer

A futures contract is marked to market on daily basis.

P (t) = s0 × e ^ (rt), using continuous compounding.

Assume interest rate of 2 %, putting in the above equation we get spot rate as

92.5 = s0 × e^(0.02×0.5)

s0 = 91.58

So on 1st april i.e 1 month from march 1 the futures price will be

91.58 × e ^ (0.02×1/12)

=91.73 + accrued interest

Accrued interest is 2 × 1/12 = 0.16.

Assumed the coupon tobe 2 peryear

So final price is 91.8

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