Some where, I remember we divide by the conversion factor, but now I see in the interest rate futures section, we multiply by the conversion factor to get the bond price…what’s the deal here?
You multiply by 1/CF, which is the same as dividing by it.
When you sign up for a futures contract on a bond - you have a particular bond to be delivered in mind. But if multiple folks try to look at the same bond for a delivery option -> you are going to have a mispricing scenario - more demand for the same bond. to prevent this from happening - the “seller” can use any of a series of bonds to deliver. They use a Conversion factor - to decide how much of the bond they would deliver. “true” Delivery Bond is assumed as being a 6% Coupon Bond delivered at Par. Now if you deliver a bond with a 7% Coupon - your price will be higher. So you would have a Conversion Factor > 1 = and you therefore (as seller) have to deliver less of the bond.
cpk, I’m referring to one place where they divide by the conversion factor (Example 4, page 113 of Derivatives), and another place where they multiply (page 323, same book)… I’ll have to dig in a little more because that can distort the result come D-day.
I do not have the book with me right now … but once I get back - I too will check…
Anyway, it’s in an optional segment (when they multiply), so I guess it is safe to just divide as always.