Bond future defintion

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Contents

Introduction

This security type describes a futures contract on a bond. For more information about bonds, refer to security type BOND.

Security description

A futures contract is an agreement to supply a specified commodity, or its cash equivalent, at an agreed date in the future.

The holder of a contract on a bond receives the interest rate exposure, and the resulting gains or losses, of the bond without having to purchase the asset. In addition, a portfolio can contain both short and long positions in futures contracts, allowing rapid adjustment of the portfolio’s duration at low cost. For these reasons, futures contracts are widely used for hedging and speculation.

FIA treats a futures contract on a bond in the same way as a bond, save that

Holdings in a futures contract typically require cash holdings in a margin settlement account. The effect of varying cash holdings on the risk and return of the portfolio is not covered here.

In the US, the Chicago Mercantile Exchange offers futures contracts on nominal 2, 5, 10 and 30 year Treasury bonds with a nominal 6% coupon. In Australia, the Australian Stock Exchange (ASX) offers futures contracts on nominal 3 and 10-year bonds, again with nominal coupons of 6% for each.

Security code

A bond future contract has type BOND_FUTURE.

Calculation of returns

Bond futures are priced using the same routine as for a generic bond. The only difference is that at each calculation date the maturity date is set to the current date, plus the term of the contract in years. For instance, on 15th June 2011 the maturity date of a 3-year contract will be set to 15th June 2014; on 16th June 2011 the maturity date will become 16th June 2014; and so on.

Security file setup

A futures contract on a bond is set up as follows:

Field number Field Type Description Sample
1 Security ID String Identification code 10YDEC2012
2 Name String Name of futures contract 10yr bond future Dec 2012
3 Start date Date Date at which record becomes effective [Blank]

01/01/2010

4 Security type String Type code for bond future (BOND_FUTURE) BOND_FUTURE
5 Currency String 3-character currency code AUD
6 Yield curve String Yield curve applicable to this security AUD_CURVE
7 Term Double Term of future, in years 10
8 Credit rating String Credit rating AAA
9 Coupon Double Nominal coupon 0.06
10 Frequency Integer Number of coupons per year 2

Returns file setup

A bond requires the following information in the returns file:

Field number Field Type Description Sample
1 Date Date Date at end of interval 30/11/2009
2 Portfolio String Name of portfolio STF1
3 Security ID String Identifier for security 10YDEC2012
4 Market weight Double Effective exposure of future within portfolio -0.02189
5 Base currency return Double Base currency return of futures contract 0.00293
6 Local currency return Double Local currency return of futures contract 0.00293

In addition, information on the bond future's yield to maturity, modified duration and convexity can also be supplied. If provided, they will be used in all subsequent attribution calculations. If not supplied, FIA will calculate its own values for these quantities using the supplied security parameters and market data.

Field number Field Type Description Sample
7 Yield to maturity Double Yield to maturity at end of current interval 0.0454
8 Modified duration Double Modified duration at end of current interval 0.540
9 Convexity Double Convexity at end of current interval 1.22

Example 1

A portfolio is short a number of 10-year AUD bond future contracts.

This security is represented by a single entry in the security definition file:

Security ID Name Start date Security type Currency Yield curve Term Credit rating Coupon Frequency
10YDEC2012 10 yr bond future Dec 2012 BOND_FUTURE AUD AUD_CURVE 10 AAA 0.06 2

The third field is left blank, indicating that future’s characteristics remain unchanged during its lifetime.

The future has the corresponding entries in the returns file:

Date Portfolio Security ID Market weight Base currency return Local currency return
3/12/2010 STF1 10YDEC2012 -0.000825768 0.00015906 0.00015906
4/12/2010 STF1 10YDEC2012 -0.000826521 0.00015882 0.00015882
5/12/2010 STF1 10YDEC2012 -0.000826533 0.00014387 0.00014387
...

These records show the weight and returns of the bill over successive days within the STF1 portfolio.

See also

Security type BOND, BILL_FUTURE


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