Describe Yield Beta and Conversion Factor, and State which metric is provided by an exchange? (6 points)
yield beta - responsiveness of contract to change in underlying conversion factor - adjustment factor to convert contract metric to cheapest to deliver PROVIDED BY EXCHANGE That’s all you should need.
Yield beta - change in implied yield to change in underlying Conversion factor - adjustment factor to derive the dollar duration of futures to DD of cheapest to deliver bond.
let me reword conversion factor - measures the relationship between the dollar duration of futures to the dollar duration of the cheapest to deliver bond
yield beta is the yield of the bond regressed on the yield of the CTD bond. or the yield of the foreign bond regressed on the domestic bond
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Just want to get things straight. I have the yield beta down as the expected relative change between the CTD and the bond/portfolio to be hedge. Can someone please give me a clear definition of the conversion factor?
conversion factor is a metric that accounts for the fact that you are using the CTD bond and not the exact bond as the underlying, in your futures hedging strategy. This CTD bond has a minimum of 15 yrs maturity as opposed to the actual bond which is used…6%, 30 year maturity. So you’re kind of compensating for the mismatch and you make it know by adjusting the DD of the futures, dividing it by the conversion factor hope this helps