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1、CHAPTERFIFTY-THREETREASURYBONDFUTURESMECHANICSANDBASISVALUATIONDAVIDT.KIMTokaiBankSinceitsinceptionin1977,thebondfuturescontracthasbeenthegrandfatherofthefamilyoffinancialfuturescontracts.Itistheprimaryvehicleforhedginganinvestor’sTreasurycashpositionsandiseasilythemostliquidTrea
2、suryfuturescontract.Ithasbecomesosuccessful,infact,thatitisoftenthedrivingforceoftheTreasurymarket.Aninvestorowningorlongabondfuturescontractcanexpectthedeliveryofoneofagroupofbondswithinacertaintime.Conversely,aninvestorwhoisshortthatcontractisexpectedtomakethatdelivery.However
3、,thebeliefthatthebondfuturescontractissimplyasubstituteforthecurrentcashlongbondispotentiallyaverycostlyone.Thebondfuturemayhavethetradingcharacteris-ticsofmanydifferentbonds.Dependingonthecurrentyieldenvironment,shapeoftheyieldcurve,andotherfactors,somebondswillobviouslyhaveamu
4、chgreaterimpactonthepricingandconsequentmovementofthefuturescontract.Oneshouldneverassumethatonlyonebondcontrolsitsprice.Thefuturescontractislikealargestationwagoncarryingagroupofbonds.Thebondsthataremostimportantsitinthefrontandhavethemostimpactonitsdirectionandspeed,butdurings
5、omeinstances,theforgottenbondsinthebackcangrabcontrolofthesteeringwheel.Thetrueessenceofbasispricingisdetermininghowlikelycertainbondsaretogaincontrolandhowlongtheywilldrive.Frequently,thecarthatseemedtobedrivingstraightontheexpectedroutecanlurchrightthroughatrader’sprofitandloss
6、(P&L)andsometimesrightoverthetrader.Thusitisofparamountimportancetocom-prehendfullythedifferentdimensionsofthecontractanditsdeliverabilityoptions.TheauthorwouldliketothankJennyNamandJiYoungParkforvaluablesuggestions.1201Copyright©2005,2001,1997,1995,1991,1987,1983byTheMcGraw-Hil
7、lCompanies,Inc.Clickherefortermsofuse.1202PART7DerivativesandTheirApplicationsMECHANICSOFTHEFUTURESCONTRACTConversionFactorTheChicagoBoardofTrade(CBOT)initiallywasaplacewhereparticipantsintheagriculturalmarket(e.g.,farmers)wenttoprotectthemselvesagainstinclementweatherandotherfa
8、ctorsthatcouldcausewidepriceanddeliveryswings.T
