why is the 10 yr futures price exp sept 07 trading around 110 when the 10 yr is at 102? i’m calculating a YTM <2% priced at 110. What am i missing? http://www.cbot.com/cbot/pub/page/0,3181,1413,00.html http://www.bloomberg.com/markets/rates/index.html
you need to look at conversion factor. Bond Futures list eligble deliverable bonds and each one has a conversion factor, (based up what coupon). So the 4.75% would have a conversion factor < 1 and therefore Bond Futures Px is approx = Bond i Px / Conversion Factor for i, but due to basis risk, this can differ. I think 1:1 is the 6% coupon now but not 100% sure.
That’s right (including the 6% part) and it’s even more complicated than that. Bond delivery provides all kinds of options that are priced into the futures contract (the most famous is the “wild card play”) but there are others.