Improving the Design of Treasury Bond Futures Contracts

Rodolfo Oviedo
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Rodolfo Oviedo: Universidad Austral and McGill University

Journal of Business, 2006, vol. 79, issue 3, pages 1293-1316

Abstract: In bond futures contracts, the seller can choose which bond to deliver from a basket of eligible issues. To make the futures invoice price (FIP) for the different eligible bonds close to their corresponding spot market prices, the FIP is made a function not only of the last futures settlement price but also of the bond chosen for delivery. In this paper, I propose an alternative function that, using these same inputs, meets the aforesaid objective much better than the current conversion factor–based function, whose poor performance is well known.

Date: 2006

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