Would anyone have a practical example of how/where this conversion factor comes from?
I think I understand that to arrive at the future price that the long party has to pay, we just multiply the “future price * conversion factor”.
My understanding is that we use this conversion factor because there’s an optionality for the short party in choosing the bond to deliver, but I have no idea really what this means. Any clarification would be super helpful as I really want to understand it. E.g., that a bond has 0.8??