Navigation Eurex Fixed Income Options: ett tillfälle att inte missa 13 Marknadsmäklare stöder permanent likviditet i Eurex ränteoptioner. I HY1 2015 uppgick den dagliga omsättningen i optioner på Bund, Bobl och Schatz Futures till över 350 000 kontrakt (plus 70 procent y-o-y). Av dessa har 30 procent handlats via orderbok och 30 procent via Eurex Strategy Wizard SM. Riktiga citat finns kontinuerligt tillgängliga för 1000 kontrakt. Strategicitater varierar mellan 500 och 1000 kontrakt. Eurex-alternativen på Bund, Bobl och Schatz Futures finns som samtal och sätter upp en rad torsörer i olika träningspriser och erbjuder därmed en hög grad av skräddarsy. Dessutom kombinerar investerare ofta flera alternativ till en handel för att genomföra en förfinad handelsstrategi. Handelsräntan sprids alltså i stor utsträckning i dessa dimensioner, till skillnad från marknaden för räntebindande terminer där handel är inriktad på den starkt flytande frontmånaderserien. Futures drivs ofta på orderdrivna marknader, där likviditet ges av det varierande tvåvägs orderflödet från den centrala orderboken. Valutahandling är citatdrivet eftersom likviditet inte kan koncentreras i ett enda kontrakt på grund av det stora spridningsräntan över strejker och utgångar och de många kombinationsmöjligheterna i optionsstrategier. Investerare hittar prisanvisningar för riskhantering och fasta omsättningsbara priser från specialiserade marknadsmäklare som tillhandahåller elektroniska citat i orderboken och telefonnotering för bokhandel. I skärmhandel kan investerare handla direkt på citerade priser och utnyttja ytterligare likviditetskällor när Market Maker-citat kompletteras vid genomförandet. Marknadsföringsnoteringar är också viktiga för gränsvärden som ingås av investerare som initierar optionsbranschen. Eurex Exchange har etablerat elektronisk offert i ränteoptioner och erbjuder permanenta och avancerade marknadsföringsprogram. Streaming quotes tillhandahålls av över ett dussin högspecialiserade marknadstillverkare som betjänar efterfrågan på direkt utförande från institutionella slutanvändare. Handlar i 1000 kontrakt och mer kan enkelt utföras i punkt-och-klicka-handel med investerare med direkt marknadstillträde. I HY1 2015 var daglig elektronisk handel i Bund, Bobl och Schatz Options över 90 000 kontrakt. Under de senaste tre åren har andelen bokvolymen i Bund Options ökat från cirka 20 procent och under 2015 bibehölls en andel på 33 procent. Andelen bokvolym i Bobl Options fördubblades från 10 till 20 procent år 2014. På samma sätt, år 2015. upp till 25 procent av volymen Schatz Options exekveras elektroniskt. Alternativen handlar inte bara som samtal och sätter men också som alternativstrategier. I november 2013 lanserade Eurex ett skräddarsyddat Market-Making-program för optionsstrategier som i allt större utsträckning lockar volymen direkt från utförandet av order mot citat från Market Makers. Under 2015 ser vi nu ett dagligt genomsnitt på 5.000 ränteoptionsoptioner som handlar mot Market Maker-citat i optionsstrategier. Precis som i handel direkt samtal och sätter, är handeln med marknadsandelar med gränsvärden också utbredd i optionsstrategier. Sedan slutet av 2013 ökade strategins volym både på grund av ökad användning av strategiposter för blockverksamhet och högre skärmvolymer efter införandet av strategin Marknadsföring. År 2015 ökade den dagliga volymen i orderboken till 32 000 kontrakt i ränteoptioner. Sammantaget omfattar strategihandel cirka 30 procent av volymen både i orderbok och bokhandel. Utöver att citera optionsstrategier strömmar marknadsmäklare också fasta priser. Således tillhandahålls likviditet för ett brett spektrum av strategier. Strategibeställningsböcker citeras vanligtvis för 500 till 1000 kontrakt på den inre marknaden beroende på riskprofilen för optionsstrategin i fråga. Intressant är strategiska citat ofta strängare än den kumulativa spridningen från ensamstående utförande av benen individuellt. Detta återspeglar korrekt riskprofilen för optionsstrategier och översätter också till lägre implicita transaktionskostnader för investerare som bara behöver korsa en budgivarspridning. SubnavigationInterest Rate Derivatives Fixed Income Trading Strategies. eurex 1 Räntebärande derivat Räntebärande handelsstrategier eurex 2 Obs! Definitionerna av bas och bärkostnad har ändrats i denna version av broschyren. I den tidigare versionen användes följande definitioner: Basis Framtidspris Pris på kassainstrument Kostnad för bärande baser I denna version används följande definitioner: Basispris på kassainstrument Framtidspris Kostnad för bärbar grund Dessa ändringar har gjorts i ordning för att säkerställa att definitionerna av båda objekten är konsekventa i hela Eurex-materialet, inklusive näringsexamen och motsvarande förberedande material. 3 Räntebärande derivat Räntebärande strategier eurex 4 Innehåll Broschyrstruktur och mål Egenskaper för värdepappersobligationer Obligationer Definition 08 Livslängd och återstående livstid 09 Nominell och faktisk ränta (kupong och avkastning) 09 Upplupen ränta 10 Avkastningskurvan 11 Obligationsvärdering 14 Macaulay Varaktighet 16 Ändrad Varaktighet 16 Konvexitet Spårningsfelet för Varaktighet Eurex Fixed Income Derivat 18 18 Egenskaper för Exchange-Traded Financial Derivatives 18 Inledning 18 Flexibilitet 18 Transparens och Likviditet 18 Hävstångseffekt Effekt Introduktion till Fixed Income Futures 19 Vad är Fixed Income Futures Definition 19 Framtidspositioner Förpliktelser 20 Avräkning eller utelämning 21 Kontraktsspecifikationer 22 Eurex Fixed Income Futures Översikt 22 Framtida Spread Marginal och Extra Margin 23 Variationsmarginal 24 Framtidspris Verkligt värde 26 Kostnad för bär och bas 27 Konverteringsfaktor (Prisfaktor) och Billigaste att leverera CTD) Obligation 28 Identifiera Billigaste att leverera Obligationer 5 Tillämpningar av fasta intäkter Futures 32 Handelsstrategier 32 Grundläggande framtidsstrategier 33 Långa positioner (tjurstrategier) 35 Korta positioner (Bearish Strategies) 36 Spridna strategier 37 Tidsspridning 38 Inter-Product Spread 40 Säkringsstrategier 41 Val av Futures Contract 41 Perfect Hedge mot Cross Hedge 41 Hedging Considerations 42 Fastställande av Hedge Ratio 43 Nominellt Value Method 43 Modifierad Varaktighetsmetod 45 Känslighetsmetod 47 Statisk och Dynamisk Hedging 47 Cash and Carry Arbitrage Introduktion till Optioner på Fixed Income Futures 49 Alternativ på Fixed Income Futures Definition 49 Options på fasta intäkter Futures Rights and Obligations 50 Closeout 50 Exercise Options på Fixed Income Futures 51 Kontraktsspecifikationer Options på Fixed Income Futures 52 Premium Betalning och Riskbaserad Marginering 54 Options på Fixed Income Futures Översikt 6 Alternativ Pris 55 Komponenter 55 Intrinsic Value 55 Tidsvärde 56 Bestämningsfaktorer 56 Volatilitet hos U nderlying Instrument 56 Alternativets återstående livslängd 57 Påverkande faktorer Viktiga riskparametrar Greker 58 Delta 60 Gamma 61 Vega (Kappa) 61 Theta Trading Strategies for Options on Fixed Income Futures 62 Långsamtal 63 Kortsamtal 65 Långt Put 66 Kort Put 67 Bull Call Spread 68 Bear Put Spread 69 Long Straddle 71 Long Strangle 72 Inverkan av Time Value Decay och Volatilitet 72 Time Value Decay 73 Effekten av fluktuationer i marknadsvolatiliteten 74 Handelsvolatilitet Behåll en Delta-Neutral Position med Futures Hedging Strategies 77 Hedging Strategies for Fixed Time Horizon 79 Delta Hedging 80 Gamma Hedging 82 Noll Cost Collar 7 FuturesOptions Relationer, Arbitrage Strategies 83 Syntetisk Fixed Income Options och Futures Positioner 83 Syntetisk Långsamtal 85 Syntetisk Kort Ringa 86 Syntetisk Lång Put 88 Syntetisk Short Put 88 Syntetisk Lång FutureReversal 90 Syntetisk Kort FutureConversion 91 Syntetisk Alternativ och framtidspositioner Översikt Ordlista 92 Bilaga 1: Värderingsformulär ulae och indikatorer 100 Enstaka kvarstående livstid 100 Många resterande livslängd 100 Macaulay Varaktighet 101 Konvexitet Bilaga 2: Konverteringsfaktorer 102 Obligationer betecknade i euro 102 Obligationer betecknade i schweiziska franc Bilaga 3: Diagramlista Kontakter 105 Ytterligare information 8 Broschyrstruktur och Mål Denna broschyr beskriver de räntebärande derivaten som handlas på Eurex och illustrerar några av deras viktigaste tillämpningar. Dessa kontrakt består av terminer på räntebärande värdepapper (räntebindningsterminaler) och optioner på räntefutures. För att bättre förstå de beskrivna kontrakten kommer de grundläggande egenskaperna hos räntebärande värdepapper och de indikatorer som används för att analysera dem att beskrivas. Grundläggande kunskaper om värdepappersindustrin är en förutsättning. Förklaringar av räntebärande värdepapper som ingår i denna broschyr hänför sig huvudsakligen till sådana emissioner som Eurex räntebärande derivat baseras på. 6 9 Egenskaper för värdepappersobligationer med fast ränta Definition En obligation kan beskrivas som storskalig upplåning på kapitalmarknaden, varvid fordringsägarnas rättigheter är certifierade i form av värdepapper. Erbjudandet av värdepapper är känt som emissioner och respektive gäldenär som emittent. Obligationer kategoriseras enligt deras livstid, emittent, räntebetalningsuppgifter, kreditvärdering och andra faktorer. Räntebärande obligationer har en räntebetalning, känd som kupongen, vilken är baserad på nominellt värde på obligationslånet. Beroende på specifikationerna är räntebetalningen vanligen halvårig eller årlig. Räntebärande derivat som handlas på Eurex baseras på en korg av antingen tyska eller schweiziska räntebindningar i statsobligationer. I Schweiz hanterar Schweiziska Nationalbanken (SNB) upplåningskraven för den schweiziska federala finansförvaltningen. Kapitalet höjas genom att utfärda så kallade penningmarknadsbokföringskrav samt statsobligationer och statsobligationer. Endast Förbundsobligationer med olika livslängder är fritt överlåtbara. Övriga statsobligationer utbyts endast mellan SNB och banker, eller i interbankhandel. Den tyska finansbyrån (Bundesrepublik Deutschland Finanzagentur GmbH) har ansvarat för att Tyskland har utfärdat tyska statsobligationer sedan juni. Andra offentligt omsättningsbara frågor omfattar obligationer utfärdade fram till 1995 av det tidigare privatiseringsorganet Treuhandanstalt och Tysklands federala regering s specialfonder, till exempel den tyska enhetsfonden. Dessa obligationer tillskrivs samma kreditvärdighet som ett resultat av Tysklands antagande om ansvar. Tyska regeringsproblem som är relevanta för Eurex-räntebärande derivat har följande livslängder och kupongbetalningsuppgifter. Regeringsfrågor Livstid Kupongbetalning Tyska federala statsobligationer 2 år Årlig (Bundesschatzanweisungen) Tysklands skuldförpliktelser 5 år Årlig (Bundesobligationen) Tyska statsobligationer 10 och 30 år Årlig (Bundesanleihen) Villkoren för dessa frågor ger inte möjlighet till förtida inlösen genom att ringa in eller ritning. 1 1 Jfr. Deutsche Bundesbank, Der Markt für deutsche Bundeswertpapiere, 2: a upplagan, FrankfurtMain, 10 I detta kapitel kommer följande information att användas för ett antal förklaringar och beräkningar: Exempel: Skuldfråga Tyska statsobligationen. av emittenten Förbundsrepubliken Tyskland. vid utfärdandedatum 5 juli, med en livstid på 10 år. ett inlösendatum den 4 juli, en fast ränta på 4,5. kupongbetalning årligen. ett nominellt värde på 100 livslängd och återstående livstid Ett måste skilja mellan livslängd och återstående livstid för att förstå räntebindningsobligationer och relaterade derivat. Livslängden betecknar tidsperioden från utfärdandedagen till dess att säkerhetens nominella värde är inlöst, medan återstående livslängd är återstående tidsperiod från värderingsdagen till inlösen av redan emitterade värdepapper. Exempel: Obligationen har en livstid på värderingsdagen, den återstående livstiden är 10 år 11 mars 2002 (idag) 9 år och 115 dagar 8 11 Nominell och faktisk ränta (kupong och avkastning) Den nominella räntan på en Räntebindning är värdet av kupongen i förhållande till säkerhetens nominella värde. I allmänhet motsvarar emittentpriset eller det omsatta priset på ett obligationslån inte sitt nominella värde. I stället handlas obligationer under eller över par, dvs deras värde ligger under eller över det nominella värdet på 100 procent. Både kupongbetalningarna och det faktiska investerade kapitalet beaktas vid beräkning av avkastningen. Det innebär att, om inte obligationen handlas till exakt 100 procent, den faktiska räntan med andra ord: avkastningen avviker från den nominella räntan. Den faktiska räntan är lägre (högre) än den nominella räntan för en obligationshandel över (under) dess nominella värde. Exempel: Obligationen har. ett nominellt värde men är handel med ett fast ränta på 4,5. en kupong på 4,5 100 en avkastning på 4,17 2 I det här fallet är obligationsräntan lägre än den nominella räntan. Upplupen ränta När ett obligationslån emitteras, kan det därefter köpas och säljas många gånger mellan de förutbestämda framtida kupongdatumen. Som sådan betalar köparen säljaren räntan upp till transaktionsdagens värde, eftersom heshe får hela kupongen vid nästa kupongbetalningsdatum. Räntan som uppkommit från det sista kupongbetalningsdagen fram till värderingsdagen kallas det upplupna räntan. Exempel: Obligationen köps 11 mars 2002 (idag) Räntan betalas årligen den 4 juli. Kupongräntan är 4,5. Perioden sedan den sista kupongen 250 dagar 3 betalning är Detta resulterar i upplupen ränta på 4,5 250365 3,08 2 Vid denna tidpunkt har vi ännu inte täckt exakt hur avkastningen beräknas. För detta ändamål behöver vi se närmare på begreppen nutid och upplupen ränta som vi kommer att beskriva i följande avsnitt. 3 Baserat på aktuell. 9 12 Avkastningskurveobligationsräntorna är i stor utsträckning beroende av emittentens kreditvärdighet och emissionens återstående livslängd. Eftersom de underliggande instrumenten för Eurex-räntebärande derivat är offentliga frågor med högkvalitativa kreditbetyg, fokuserar förklaringarna nedan på korrelationen mellan avkastning och återstående livstid. Dessa presenteras ofta som en matematisk funktion den så kallade avkastningskurvan. På grund av sitt långsiktiga kapitalåtagande tenderar obligationer med längre livslängd generellt att ge mer än de med kortare återstående livstid. Detta kallas en normal avkastningskurva. En platt avkastningskurva är där alla återstående livslängder har samma intresse. En inverterad avkastningskurva kännetecknas av en nedåtgående sluttningskurva. Avkastningskurvor Avkastning Återstående livstid Inverterad avkastningskurva Flat avkastningskurva Normal avkastningskurva 10 13 Obligationsvärdering I de föregående avsnitten såg vi att obligationer har ett visst utbyte under en viss återstående livstid. Dessa räntor kan beräknas med hjälp av marknadens värde (pris), kupongbetalningar och inlösen (kassaflöden). På vilket marknadsvärde (pris) motsvarar obligationsräntan (aktuell räntesats) de rådande marknadsräntorna. I följande exempel används för att förtydliga en enhetlig penningmarknadsränta (EURIBOR) för att representera marknadsräntan, även om detta reflekterar inte riktigt omständigheterna på kapitalmarknaden. En bindning med årliga kupongbetalningar som förfaller på exakt ett år s tid används för denna steg för steg förklaring. Kupongen och det nominella värdet återbetalas vid förfallodagen. Exempel: Penningmarknadsräntan p. a. 3,63 Obligation 4,5 Förbundsrepubliken Tyskland Skuldförsäkring på grund av 10 juli 2003 Nominellt värde 100 Kupong 4,5 100 4,50 Värderingsdatum 11 juli 2002 (idag) Detta resulterar i följande ekvation: 4 Nuvärde Nominellt värde (n) Kupong (c) Penningmarknadsränta (r) För att bestämma nuvärdet av ett obligationslån delas de framtida betalningarna med avkastningsfaktorn (1 Penningmarknadsränta). Denna beräkning kallas diskontering av kassaflödet. Det resulterande priset kallas nuvärdet, eftersom det genereras vid nuvarande tidpunkt (idag). Följande exempel visar framtida betalningar för ett obligationslån med en återstående livstid på tre år. 4 Jfr. Bilaga 1 för allmänna formler. 11 14 Exempel: Penningmarknadsräntan p. a. 3,63 Obligation 4,5 Förbundsrepubliken Tyskland Skuldförsäkring förfallit den 11 juli 2005 Nominellt värde 100 Kupong 4,5 100 4,50 Värderingsdatum 12 juli 2002 (idag) Obligationspriset kan beräknas med följande ekvation: Nuvärde Kupong (c1) Kupong c2) Nominellt värde (n) Kupong (c3) Avkastningsfaktor (Avkastningsfaktor) 2 (Avkastningsfaktor) Nuvärde () () 2 () 3 Vid beräkning av en obligation för ett datum som inte sammanfaller med kupongbetalningsdagen Första kupongen behöver endast diskonteras för återstående livstid fram till nästa kupongbetalningsdatum. Exponentieringen av avkastningsfaktorn tills bindningen matas ändras därefter. Exempel: Penningmarknadsräntan p. a. 3,63 Obligation 4,5 Förbundsrepubliken Tyskland skuldsäkerhet på 4 juli 2011 Nominellt värde 100 Kupong 4,5 100 4,50 Värderingsdatum 11 mars 2002 (idag) Återstående livstid för första kupongen 115 dagar eller 115 365 år Upplupna räntor 4,5 250365 3,08 Årsbasis räntesatsen beräknas pro rata för villkor som är kortare än ett år. Diskonteringsfaktorn är: () Räntan måste höjas till en högre effekt för återstående livslängd än ett år (1.315, 2.315 år). Detta kallas också för att sammanslaga intresset. Obligationspriset är således: Nuvärde () () () 15 Diskonteringsfaktorn för mindre än ett år ökar också till en högre effekt i syfte att förenkla. 5 Den tidigare ekvationen kan tolkas så att nuvärdet av bindningen är lika med summan av dess individuella nuvärden. Med andra ord motsvarar det summan av alla kupongbetalningar och återbetalning av nominellt värde. Denna modell kan endast användas över en tidsperiod om en konstant marknadsränta antas. Den implicita plattavkastningskurvan tenderar inte att återspegla verkligheten. Trots denna förenkling utgör fastställandet av nuvärdet med en platt avkastningskurva grunden för ett antal riskindikatorer. Dessa beskrivs i följande kapitel. Man måste skilja mellan nuvärdet (smutsigt pris) och rentpriset när man noterar obligationspriser. Enligt gällande konvention är det handlade priset det rena priset. Rentpriset kan bestämmas genom att subventionera upplupen ränta från det smutsiga priset. Det beräknas enligt följande: Rent pris Nuvärde Upplupen ränta Rentpris Följande avsnitt skiljer mellan ett nuvärde av ett obligationsbelopp och ett börsnoterat pris (rent pris). En förändring av marknadsräntorna har en direkt inverkan på diskonteringsfaktorerna och därmed nuvärdet av obligationer. Baserat på exemplet ovan resulterar detta i följande nuvärde om räntorna ökar med en procentenhet från 3,63 procent till 4,63 procent: Nuvärde () () () Det rena priset ändras enligt följande: Rent pris En ökning av räntorna ledde till ett fall på 7,06 procent i obligationsvärdet från det rena priset, men föll med 7,26 procent, från till Följande regel gäller för att beskriva förhållandet mellan nuvärdet eller rentpriset på ett obligationslån och räntesats Utvecklingen: Obligationspriser och marknadsräntor reagerar omvänt mot varandra. 5 jfr. Bilaga 1 för allmänna formler. 13 16 Macaulay Varaktighet I föregående avsnitt såg vi hur ett obligationspris påverkades av en ränteförändring. Räntesensibiliteten hos obligationer kan också mätas med hjälp av begreppen Macaulay-varaktighet och modifierad varaktighet. Macaulay-varaktighetsindikatorn utvecklades för att analysera räntekänsligheten för obligationer eller obligationsportföljer för att säkra mot ogynnsamma ränteförändringar. Som tidigare förklarades är förhållandet mellan marknadsräntorna och nuvärdet av obligationer inverterat: den omedelbara effekten av stigande avkastningar är en prisförlust. Ändå betyder högre räntor att mottagna kupongbetalningar kan återinvesteras till mer lönsamma priser, vilket ökar portföljens framtida värde. Macaulay-varaktigheten, som vanligtvis uttrycks i år, återspeglar perioden i slutet av vilken båda faktorerna är i balans. Det kan därmed användas för att säkerställa att portföljs känslighet är i linje med en fastställd investeringshorisont. Observera att konceptet är baserat på antagandet om en platt avkastningskurva och en parallellväxling i avkastningskurvan där avkastningen av alla löptider förändras på samma sätt. Macaulay-varaktighet används för att sammanfatta räntekänsligheten i ett enda nummer: förändringar i varaktigheten för ett obligation eller varaktighetsskillnader mellan olika obligationer bidrar till att mäta relativa risker. Följande grundläggande relationer beskriver egenskaperna hos Macaulay-varaktighet: Macaulay-varaktigheten är lägre, desto kortare är återstående livstid, desto högre är marknadsräntan och ju högre kupongen. Observera att en högre kupong faktiskt minskar risken för ett obligationslån jämfört med ett band med en lägre kupong: detta indikeras av lägre Macaulay-varaktighet. Macaulay-varaktigheten för bindningen i föregående exempel beräknas enligt följande: 14 17 Exempel Värderingsdatum 11 mars 2002 Säkerhet 4,5 Förbundsrepubliken Tyskland skuldsäkerhet på 4 juli 2011 Penningmarknadsräntan p. a. 3,63 Obligationspris Beräkning: () Macaulay-varaktighet () () Macaulay-varaktighet 7,65 år De 0,315, 1,315 faktorerna gäller de återstående livslängden på kupongerna och återbetalningen av det nominella värdet. Återstående livslängder multipliceras med nuvärdet av individuella återbetalningar. Macaulay-varaktigheten är summan av återstående löptid för varje kassaflöde, viktat med andelen av detta kassaflödes nuvärde i det totala nuvärdet av obligationslånet. Därför domineras Macaulay-varaktigheten för en obligation av den återstående livslängden för de betalningarna med högsta nuvärde. Macaulay-varaktighet (genomsnittlig återstående livstid viktad med nuvärde) Nuvärde multiplicerat med löptid för kassaflöde År Vikten av enskilda kassaflöden Macaulay-varaktighet 7,65 år Macaulay-varaktighet kan också tillämpas på obligationsportföljer genom att ackumulera varaktighetsvärdena för enskilda obligationer, viktat enligt deras andel av portföljens nuvärde. 15 18 Ändrad längd Den modifierade varaktigheten bygger på konceptet Macaulay-varaktighet. Den modifierade varaktigheten återspeglar den procentuella förändringen av nuvärdet (rent pris plus upplupen ränta) med en förändring av marknadsräntan med en enhet (en procentenhet). Den modifierade varaktigheten motsvarar det negativa värdet av Macaulay-varaktigheten, diskonterad över en tidsperiod: Ändrad varaktighet Varaktighet 1 Avkastning Den modifierade varaktigheten för exemplet ovan är: Modifierad varaktighet 7,65 7,38 Enligt modifierad varaktighetsmodell är en en procentenhet räntehöjningen borde leda till ett 7,38 procent fall i nuvärdet. Konvexitet Spårningsfel av varaktighet Trots giltigheten av de antaganden som avses i föregående avsnitt tenderar beräkningen av värdeförändringen med den modifierade varaktigheten att vara oriktig på grund av antagandet om en linjär korrelation mellan nuvärdet och räntorna. I allmänhet tenderar emellertid prisindexförbindelsen med obligationer att vara konvex, och därför är en prisökning beräknad med hjälp av den modifierade varaktigheten underskattad eller överskattad. Förhållande mellan Obligationspriser och kapitalmarknadsräntor P 0 16 Nuvärde Marknadsränta (ränta) r 0 Priceyield-förhållande med modifierad varaktighetsmodell Faktiskt priceyield-förhållande Konvexitetsfel 19 I allmänhet desto större är förändringarna i räntan desto mer osäkra uppskattningarna för nuvarande värdeändringar kommer att använda ändrad varaktighet. I det använda exemplet resulterade den nya beräkningen i ett fall på 7,06 procent i nuvärdet av obligationsvärdet, medan uppskattningen med den modifierade varaktigheten var 7,38 procent. De felaktigheter som härrör från icke-linearitet vid användning av modifierad varaktighet kan korrigeras med hjälp av den så kallade konvexitetsformeln. Jämfört med modifierad varaktighetsformel multipliceras varje element i summeringen i täljaren med (1 t c1) och den givna nämnaren med (1 t r c1) 2 vid beräkning av konvexitetsfaktorn. Beräkningen nedan använder samma tidigare exempel: () () () () Konvexitet () () () Denna konvexitetsfaktor används i följande ekvation: Andel nuvärdesförändring av obligation Ändrad varaktighet Förändring av marknadsräntor Konvexitet (Ändring i marknadsräntor) 2 En ökning av räntan från 3,63 procent till 4,63 procent skulle resultera i: Andel nuvärdesförändring av obligationen 7,38 (0,01) (0,01) 2 7,03 Resultatet av de tre beräkningsmetoderna jämförs nedan: Beräkningsmetod: Resultat Beräkna nuvärdet 7.06 Projicering med modifierad varaktighet 7.38 Projicering med modifierad varaktighet och 7.03 konvexitet Detta illustrerar att hänsyn tas till konvexiteten ger ett resultat som liknar det pris som uppnåddes vid omräkningen, medan uppskattningen med den modifierade varaktigheten avviker signifikant. Man bör emellertid notera att en jämn ränta användes för alla återstående livstider (platt avkastningskurva) i alla tre exemplen. 17 20 Eurex Fixed Income Derivatives Egenskaper för Exchange-Traded Financial Derivatives Inledning Kontrakt för vilka priserna härrör från underliggande värdepapper eller råvaror för värdepappersmarknaden (som kallas underliggande instrument eller underlag) som aktier, obligationer eller olja är kända som derivatinstrument eller helt enkelt derivat. Handelsderivat utmärks av det faktum att avräkning sker på specifika datum (avvecklingsdatum). Betalning mot leverans för kontantmarknadstransaktioner måste ske efter två eller tre dagar (avvecklingsperiod), börshandlade terminer och optionsavtal, med undantag för utövande av optioner, kan föreskriva avräkning på bara fyra specifika datum under året. Derivat handlas både på organiserade derivatutbyten som Eurex och på OTC-marknaden. För det mesta särskiljer standardiserade kontraktsspecifikationer och processen för markering till marknad eller marginalisering via ett clearinghus valutahandlade produkter från OTC-derivat. Eurex listar terminer och optioner på finansiella instrument. Flexibilitet Organiserade derivatutbyten ger investerare möjligheter att ingå en position utifrån deras marknadsuppfattning och i enlighet med deras aptit för risk, men utan att behöva köpa eller sälja värdepapper. Genom att ingå en diskotransaktion kan de neutralisera (stänga) sin position före kontraktets löptid. Eventuella vinster eller förluster som uppkommit på öppna positioner i terminer eller optioner på terminer krediteras eller debiteras dagligen. Transparency and Liquidity Trading standardiserade kontrakt resulterar i en koncentration av orderflöden och därigenom säkerställer likviditet på marknaden. Likviditet innebär att stora mängder av en produkt kan köpas och säljas när som helst utan allvarlig inverkan på priserna. Elektronisk handel på Eurex garanterar omfattande insyn i priser, volymer och genomförda transaktioner. Hävstångseffekt Vid ingående av optioner eller terminshandel är det inte nödvändigt att betala hela värdet av det underliggande instrumentet framåt. Därför är den procentuella vinst - eller förlustpotentialen för dessa terminsransaktioner, vad gäller den investerade eller pantsatta kapitalen, mycket större än för de faktiska obligationerna eller aktierna. 18 21 Introduktion till fasta intäkter Futures Vad är fast inkomst Futures Definition Räntebärande terminer är standardiserade valutaterminer mellan två parter, baserade på räntebärande instrument som obligationer med kuponger. De utgör skyldigheten. att köpa Köpare Lång framtid Lång framtid. eller att leverera Säljare Kort framtid Kort framtid. ett givet finansiellt underliggande tyskt schweiziskt konvergeringsinstrument instrument statsobligationsobligationer. med en viss år 8-13 år kvarstående livstid i en viss mängd Kontraktsstorlek 100.000 CHF 100.000 nominellt nominellt. vid en uppsättning löptid 10 mars 2002 10 mars 2002 i tid. till ett bestämt pris för framtida priser Eurex räntebärande derivat baseras på leverans av ett underliggande obligation som har en återstående löptid enligt ett förutbestämt intervall. Kontraktets leveransbara lista innehåller obligationer med olika kupongnivåer, priser och förfallodagar. För att standardisera leveransprocessen används konceptet med en teoretisk bindning. Se avsnittet nedan om kontraktspecifikation och omvandlingsfaktorer för mer detaljer. Futures Positioner Obligationer En futuresposition kan antingen vara lång eller kort. Lång position Köp ett terminskontrakt Köparens förpliktelser: Vid förfallodagen resulterar en lång position automatiskt i skyldigheten att köpa leveransbara obligationer: Skyldigheten att köpa det ränteinstrument som är relevant för kontraktet vid leveransdatum till det förutbestämda priset. Kort position Försäljning av terminsavtal Säljarens åtaganden: Vid förfallodatum resulterar en kort position automatiskt i skyldigheten att leverera sådana obligationer: Skyldigheten att leverera ränteinstrumentet relevant för kontraktet vid leveransdatum till det förutbestämda priset. 19 22 Avveckling eller slutkonto Futures är vanligtvis avvecklade genom en kontantavveckling eller genom att fysiskt leverera det underliggande instrumentet. Eurex räntebindningsterminaler tillhandahåller fysisk leverans av värdepapper. Innehavaren av en kort position är skyldig att leverera antingen långfristiga Schweiziska Förbundsobligationer eller kort-, medelfristiga eller långfristiga tyska statsobligationer, beroende på det överlåtna avtalet. Innehavaren av motsvarande långa position måste acceptera leverans mot betalning av leveranspriset. Värdepapper hos respektive emittenter vars återstående livstid på terminskontrakten ligger inom de angivna parametrarna för varje kontrakt kan levereras. Dessa parametrar är också kända som mognadsområden för leverans. Valet av obligationen som ska levereras måste anmälas (anmälningsskyldighet för innehavaren av den korta positionen). Värderingen av ett obligationslån beskrivs i avsnittet om obligationsvärdering. Det är emellertid värt att notera att när man går in på en terminskontrakt är det inte nödvändigtvis baserat på avsikt att faktiskt leverera eller ta emot de underliggande instrumenten vid förfallodagen. Till exempel är terminer utformade för att spåra prisutvecklingen för det underliggande instrumentet under kontraktets livstid. In the event of a price increase in the futures contract, an original buyer of a futures contract is able to realize a profit by simply selling an equal number of contracts to those originally bought. The reverse applies to a short position, which can be closed out by buying back futures. As a result, a noticeable reduction in the open interest (the number of open long and short positions in each contract) occurs in the days prior to maturity of a bond futures contract. Whilst during the contract s lifetime, open interest may well exceed the volume of deliverable bonds available, this figure tends to fall considerably as soon as open interest starts shifting from the shortest delivery month to the next, prior to maturity (a process known as rollover ). 20 23 Contract Specifications Information on the detailed contract specifications of fixed income futures traded at Eurex can be found in the Eurex Products brochure or on the Eurex website The most important specifications of Eurex fixed income futures are detailed in the following example based on Euro Bund Futures and CONF Futures. A trader buys: 2 Contracts The futures transaction is based on a nominal value of 2 x EUR 100,000 of deliverable bonds for the Euro Bund Future, or 2 x CHF 100,000 of deliverable bonds for the CONF Future. June 2002 Maturity month The next three quarterly months within the cycle MarchJuneSeptemberDecember are available for trading. Thus, the Euro Bund and CONF Futures have a maximum remaining lifetime of nine months. The Last Trading Day is two exchange trading days before the 10th calendar day (delivery day) of the maturity month. Euro Bund or Underlying instrument The underlying instrument for Euro Bund Futures CONF Futures, is a 6 notional long-term German Government respectively Bond. For CONF Futures it is a 6 notional Swiss Confederation Bond. at or Futures price The futures price is quoted in percent, to two. decimal points, of the nominal value of the respectively underlying bond. The minimum price change (tick) is EUR or CHF (0.01). In this example, the buyer is obliged to buy either German Government Bonds or Swiss Confederation Bonds, which are included in the basket of deliverable bonds, to a nominal value of EUR or CHF 200,000, in June 24 Eurex Fixed Income Futures Overview The specifications of fixed income futures are largely distinguished by the baskets of deliverable bonds that cover different maturity ranges. The corresponding remaining lifetimes are set out in the following table: Underlying instrument: Nominal Remaining lifetime of Product code German Government debt contract value the deliverable bonds securities Euro Schatz Future EUR 100, 4 to 2 1 4 years FGBS Euro Bobl Future EUR 100, 2 to 5 1 2 years FGBM Euro Bund Future EUR 100, 2 to 10 1 2 years FGBL Euro Buxl Future EUR 100, to 30 1 2 years FGBX Underlying instrument: Nominal Remaining lifetime of Product code Swiss Confederation Bonds contract value the deliverable bonds CONF Future CHF 100,000 8 to 13 years CONF Futures Spread Margin and Additional Margin When a futures position is created, cash or other collateral is deposited with Eurex Clearing AG the Eurex clearing house. Eurex Clearing AG seeks to provide a guarantee to all clearing members in the event of a member defaulting. This Additional Margin deposit is designed to protect the clearing house against a forward adverse price movement in the futures contract. The clearing house is the ultimate counterparty in all Eurex transactions and must safeguard the integrity of the market in the event of a clearing member default. Offsetting long and short positions in different maturity months of the same futures contract are referred to as time spread positions. The high correlation of these positions means that the spread margin rates are lower than those for Additional Margin. Additional Margin is charged for all non-spread positions. Margin collateral must be pledged in the form of cash or securities. A detailed description of margin requirements calculated by the Eurex clearing house (Eurex Clearing AG) can be found in the brochure on Risk Based Margining. 22 25 Variation Margin A common misconception regarding bond futures is that when delivery of the actual bonds are made, they are settled at the original opening futures price. In fact delivery of the actual bonds is made using a final futures settlement price (see the section below on conversion factor and delivery price). The reason for this is that during the life of a futures position, its value is marked to market each day by the clearing house in the form of Variation Margin. Variation Margin can be viewed as the futures contract s profit or loss, which is paid and received each day during the life of an open position. The following examples illustrate the calculation of the Variation Margin, whereby profits are indicated by a positive sign, losses by a negative sign. Calculating the Variation Margin for a new long futures position: Futures Daily Settlement Price Futures purchase or selling price Variation Margin The Daily Settlement Price of the CONF Future in our example is The contracts were bought at a price of Example CONF Variation Margin: CHF 121,650 (121.65 of CHF 100,000) CHF 121,500 (121.50 of CHF 100,000) CHF 150 On the first day, the buyer of the CONF Future makes a profit of CHF 150 per contract (0.15 percent of the nominal value of CHF 100,000), that is credited via the Variation Margin. Alternatively the calculation can be described as the difference between 15 ticks. The futures contract is based upon CHF 100,000 nominal of bonds, so the value of a small price movement (tick) of CHF 0.01 equates to CHF 10 (i. e. 1, ). This is known as the tick value. Therefore the profit on the one futures trade is 15 CHF 10 1 CHF 26 The same process applies to the Euro Bund Future. The Euro Bund Futures Daily Settlement Price is It was bought at The Variation Margin calculation results in the following: Example Long Euro Bund Variation Margin: EUR 105,700 (105.70 of EUR 100,000) EUR 106,000 (106.00 of EUR 100,000) EUR 300 The buyer of the Euro Bund Futures incurs a loss of EUR 300 per contract (0.3 percent of the nominal value of EUR 100,000), that is consequently debited by way of Variation Margin. Alternatively 30 ticks loss multiplied by the tick value of one bund future (EUR 10) EUR 300. Calculating the Variation Margin during the contract s lifetime: Futures Daily Settlement Price on the current exchange trading day Futures Daily Settlement Price on the previous exchange trading day Variation Margin Calculating the Variation Margin when the contract is closed out: Futures price of the closing transaction Futures Daily Settlement Price on the previous exchange trading day Variation Margin The Futures Price Fair Value While the chapter quotBond Valuation focused on the effect of changes in interest rate levels on the present value of a bond, this section illustrates the relationship between the futures price and the value of the corresponding deliverable bonds. A trader who wishes to acquire bonds on a forward date can either buy a futures contract today on margin, or buy the cash bond and hold the position over time. Buying the cash bond involves an actual financial cost which is offset by the receipt of coupon income (accrued interest). The futures position on the other hand, over time, has neither the financing costs nor the receipts of an actual long spot bond position (cash market). 24 27 Therefore to maintain market equilibrium, the futures price must be determined in such a way that both the cash and futures purchase yield identical results. Theoretically, it should thus be impossible to realize risk-free profits using counter transactions on the cash and forward markets (arbitrage). Both investment strategies are compared in the following table: Time Period Futures purchase Cash bond purchase investmentvaluation investmentvaluation Today Entering into a futures position Bond purchase (market price (no cash outflow) plus accrued interest) Futures Investing the equivalent value of Coupon credit (if any) and lifetime the financing cost saved, on the money market investment of the money market equivalent value Futures Portfolio value Portfolio value delivery Bond (purchased at the futures Value of the bond including price) Income from the money accrued interest Any coupon market investment of the credits Any interest on the financing costs saved coupon income Taking the factors referred to above into account, the futures price is derived in line with the following general relationship: 6 Futures price Cash price Financing costs Proceeds from the cash position Which can be expressed mathematically as: 7 Futures price C t (C t c t t0 ) t r c T t c T t Whereby: C t Current clean price of the underlying security (at time t) c Bond coupon (percent actualactual for euro-denominated bonds) t 0 Coupon date t Value date t r c Short-term funding rate (percent actual360) T Futures delivery date T-t Futures remaining lifetime (days) 6 Readers should note that the formula shown here has been simplified for the sake of transparency specifically, it does not take into account the conversion factor, interest on the coupon income, borrowing costlending income or any diverging value date conventions in the professional cash market. 7 Please note that the number of days in the year (denominator) depends on the convention in the respective markets. Financing costs are usually calculated based on the money market convention (actual360), whereas the accrued interest and proceeds from the cash positions are calculated on an actualactual basis, which is the market convention for all euro-denominated government bonds. 25 28 Cost of Carry and Basis The difference between the proceeds from and the financing costs of the cash position coupon income is referred to as the cost of carry. The futures price can also be expressed as follows: 8 Price of the deliverable bond Futures price Cost of carry The basis is the difference between the bond price in the cash market (expressed by the prices of deliverable bonds) and the futures price, and is thus equivalent to the following: Price of the deliverable bond Futures price Basis The futures price is either lower or higher than the price of the underlying instrument, depending on whether the cost of carry is positive or negative. The basis diminishes with approaching maturity. This effect is called basis convergence and can be explained by the fact that as the remaining lifetime decreases, so do the financing costs and the proceeds from the bonds. The basis equals zero at maturity. The futures price is then equivalent to the price of the underlying instrument this effect is called basis convergence. Basis Convergence (Schematic) Negative Cost of Carry Positive Cost of Carry Price Time Price of the deliverable bond Futures price 0 The following relationships apply: Financing costs gt Proceeds from the cash position: gt Negative cost of carry Financing costs lt Proceeds from the cash position: gt Positive cost of carry 26 8 Cost of carry and basis are frequently shown in literature using a reverse sign. 29 Conversion Factor (Price Factor) and Cheapest-to-Deliver (CTD) Bond The bonds eligible for delivery are non-homogeneous although they have the same issuer, they vary by coupon level, maturity and therefore price. At delivery the conversion factor is used to help calculate a final delivery price. Essentially the conversion factor generates a price at which a bond would trade if its yield were six percent on delivery day. One of the assumptions made in the conversion factor formula is that the yield curve is flat at the time of delivery, and what is more, it is at the same level as that of the futures contract s notional coupon. Based on this assumption the bonds in the basket for delivery should be virtually all equally deliverable. Of course, this does not truly reflect reality: we will discuss the consequences below. The delivery price of the bond is calculated as follows: Delivery price Final Settlement Price of the future Conversion factor of the bond Accrued interest of the bond Calculating the number of interest days for issues denominated in Swiss francs and euros is different (Swiss francs: 30360 euros: actualactual), resulting in two diverging conversion factor formulae. These are included in the appendices. The conversion factor values for all deliverable bonds are displayed on the Eurex website The conversion factor (CF) of the bond delivered is incorporated as follows in the futures price formula (see p. 25 for an explanation of the variables used): Theoretical futures price 1 C t (C t c t t0 ) t r c T t c T t CF The following example describes how the theoretical price of the Euro Bund Future June 2002 is calculated. 27 30 Example: Trade date May 3, 2002 Value date May 8, 2002 Cheapest-to-deliver bond 3.75 Federal Republic of Germany debt security due on January 4, 2011 Price of the cheapest-to-deliver Futures delivery date June 10, 2002 Accrued interest 3.75 (124365) 100 1.27 Conversion factor of the CTD Money market rate p. a. 3.63 1 Theoretical futures price ( ) Theoretical futures price Theoretical futures price In reality the actual yield curve is seldom the same as the notional coupon level also, it is not flat as implied by the conversion factor formula. As a result, the implied discounting at the notional coupon level generally does not reflect the true yield curve structure. The conversion factor thus inadvertently creates a bias which promotes certain bonds for delivery above all others. The futures price will track the price of the deliverable bond that presents the short futures position with the greatest advantage upon maturity. This bond is called the cheapest to deliver (or CTD ). In case the delivery price of a bond is higher than its market valuation, holders of a short position can make a profit on the delivery, by buying the bond at the market price and selling it at the higher delivery price. They will usually choose the bond with the highest price advantage. Should a delivery involve any price disadvantage, they will attempt to minimize this loss. Identifying the Cheapest-to-Deliver Bond On the delivery day of a futures contract, a trader should not really be able to buy bonds in the cash bond market, and then deliver them immediately into the futures contract at a profit if heshe could do this it would result in a cash and carry arbitrage. We can illustrate this principle by using the following formula and examples. Basis Cash bond price (Futures price Conversion factor) 28 31 At delivery, basis will be zero. Therefore, at this point we can manipulate the formula to achieve the following relationship: Cash bond price Futures price Conversion factor This futures price is known as the zero basis futures price. The following table shows an example of some deliverable bonds (note that we have used hypothetical bonds for the purposes of illustrating this effect). At a yield of five percent the table records the cash market price at delivery and the zero basis futures price (i. e. cash bond price divided by the conversion factor) of each bond. Zero Basis Futures Price at 5 Yield Coupon Maturity Conversion factor Price at 5 yield Price divided by conversion factor 5 0715 0304 0513 We can see from the table that each bond has a different zero basis futures price, with the 7 05132011 bond having the lowest zero basis futures price of In reality of course only one real futures price exists at delivery. Suppose that at delivery the real futures price was If that was the case an arbitrageur could buy the cash bond (7 051302) at and sell it immediately via the futures market at and receive This would create an arbitrage profit of two ticks. Neither of the two other bonds would provide an arbitrage profit, however, with the futures at Accrued interest is ignored in this example as the bond is bought and sold into the futures contract on the same day. 29 32 It follows that the bond most likely to be used for delivery is always the bond with the lowest zero basis futures price the cheapest cash bond to purchase in the cash market in order to fulfill a short delivery into the futures contract, i. e. the CTD bond. Extending the example further, we can see how the zero basis futures prices change under different market yields and how the CTD is determined. Zero basis futures price at 5, 6, 7 yield Coupon Maturity Conversion Price Price Price Price Price Price factor at 5 CF at 6 CF at 7 CF 5 0715 0304 0513 The following rules can be deducted from the table above: If the market yield is above the notional coupon level, bonds with a longer duration (lower coupon given similar maturities longer maturity given similar coupons) will be preferred for delivery. If the market yield is below the notional coupon level, bonds with a shorter duration (higher coupon given similar maturitiesshorter maturity given similar coupons) will be preferred for delivery. When yields are at the notional coupon level (six percent) the bonds are almost all equally preferred for delivery. As we pointed out above, this bias is caused by the incorrect discount rate of six percent implied by the way the conversion factor is calculated. For example, when market yields are below the level of the notional coupon, all eligible bonds are undervalued in the calculation of the delivery price. This effect is least pronounced for bonds with a low duration as these are less sensitive to variations of the discount rate (market yield). 9 So, if market yields are below the implied discount rate (i. e. the notional coupon rate), low duration bonds tend to be cheapest-to-deliver. This effect is reversed for market yields above six percent. 9 Cf. chapters Macaulay Duration and Modified Duration. 30 33 The graph below shows a plot of the three deliverable bonds, illustrating how the CTD changes as the yield curve shifts. Identifying the CTD under Different Market Conditions CTD 7 05132011 CTD 5 0715 Zero basis futures price Market yield 6 7 5 07152012 6 03042012 7 0513 34 Applications of Fixed Income Futures There are three motives for using derivatives: trading, hedging and arbitrage. Trading involves entering into positions on the derivatives market for the purpose of making a profit, assuming that market developments are predicted correctly. Hedging means securing the price of an existing or planned portfolio. Arbitrage is exploiting price imbalances to achieve risk-free profits. To maintain the balance in the derivatives markets it is important that both traders and hedgers are active thus providing liquidity. Trades between hedgers can also take place, whereby one counterparty wants to hedge the price of an existing portfolio against price losses and the other the purchase price of a future portfolio against expected price increases. The central role of the derivatives markets is the transfer of risk between these market participants. Arbitrage ensures that the market prices of derivative contracts diverge only marginally and for a short period of time from their theoretically correct values. Trading Strategies Basic Futures Strategies Building exposure by using fixed income futures has the attraction of allowing investors to benefit from expected interest rate moves without having to tie up capital by buying bonds. For a simple futures position, contrary to investing on the cash market, only Additional Margin needs to be pledged (cf. chapter Futures Spread Margin and Additional Margin ). Investors incurring losses on their futures positions possibly as a result of incorrect market forecasts are obliged to settle these losses immediately, and in full ( Variation Margin). During the lifetime of the futures contract this could amount to a multiple of the amount pledged. The change in value relative to the capital invested is consequently much higher than for a similar cash market transaction. This is called the leverage effect. In other words, the substantial profit potential associated with a straight fixed income future position is reflected by the significant risks involved. 32 35 Long Positions ( Bullish Strategies) Investors expecting falling market yields for a certain remaining lifetime will decide to buy futures contracts covering this section of the yield curve. If the prediction turns out to be correct, a profit is made on the futures position. As is characteristic for futures contracts, the profit potential on such a long position is proportional to its risk exposure. In principle, the priceyield relationship of a fixed income futures contract corresponds to that of a portfolio of deliverable bonds. Profit and Loss Profile on the Last Trading Day, Long Fixed Income Futures 0 Profit and loss Bond price PL long fixed income futures Rationale The trader wants to benefit from a forecast development without tying up capital in the cash market. Initial Situation The trader assumes that yields on German Federal Debt Obligations (Bundesobligationen) will fall. Strategy The trader buys ten Euro Bobl Futures June 2002 at a price of. with the intention to close out the position during the contract s lifetime. If the price of the Euro Bobl Futures rises, the trader makes a profit on the difference between the purchase price and the higher selling price. Constant analysis of the market is necessary to correctly time the position exit by selling the contracts. 33 36 The calculation of Additional and Variation Margins for a hypothetical price development is illustrated in the following table. The Additional Margin is derived by multiplying the margin parameter, as set by Eurex Clearing AG (in this case EUR 1,000 per contract), by the number of contracts. Date Transaction Purchase Daily Variation Variation Additional selling price Settlement Margin 10 Margin Margin 11 Price profit in EUR loss in EUR in EUR 0311 Buy ,900 10,000 Euro Bobl Futures June ,700 03 ,100 03 ,400 03 ,100 03 ,200 0320 Sell ,500 Euro Bobl Futures June 21 10,000 Result ,600 5,900 0 Changed Market Situation: The trader closes out the futures position at a price of on March 20. The Additional Margin pledged is released the following day. Result: The proceeds of EUR 2,700 made on the difference between the purchase and sale is equivalent to the balance of the Variation Margin (EUR 8,600 EUR 5,900) calculated on a daily basis. Alternatively the net profit is the sum of the futures price movement multiplied by ten contracts multiplied by the point value of EUR 1,000: ( ) 10 EUR 1,000 EUR 2, Cf. chapter Variation Margin. 11 Cf. chapter Futures Spread Margin and Additional Margin. 34Navigation Eurex Fixed Income Options: an opportunity not to be missed 13 Market Makers are permanently supporting liquidity in Eurex fixed income options. In HY1 2015, daily turnover in options on Bund, Bobl and Schatz Futures totalled over 350,000 contracts (plus 70 percent y-o-y) Thereof, 30 percent have been traded via orderbook and 30 percent via Eurex Strategy Wizard SM . Outright quotes are continuously available for 1,000 contracts. Strategy quotes range between 500 and 1,000 contracts. Eurex options on Bund, Bobl and Schatz Futures are available as calls and puts with a range of tenors in a variety of exercise prices and thus offer a high degree of tailoring. In addition, investors often combine multiple options into one trade to execute a refined trading strategy. Trading interest is thus broadly spread out in these dimensions, in contrast to fixed income futures market where trading is focused on the highly liquid front month series. Futures are often operated in order driven markets, where liquidity is provided by the varying two-way order flow from the central order book. Option trading is quote driven as liquidity cannot be concentrated in one single contract due to the widely-spread trading interest over strikes and expiries and the numerous combination possibilities in options strategies. Investors find price guidance for risk management and firm tradable prices from specialized Market Makers who provide electronic quotes in the order book and phone quotes for off-book trading. In screen trading, investors can trade directly on quoted prices and utilize additional sources of liquidity when Market Maker quotes are replenished upon execution. Market Maker quotes are also important for limit orders entered by investors initiating options trades . Eurex Exchange has established electronic quotation in fixed income options and offers permanent and advanced Market-Making programs. Streaming quotes are provided by over a dozen highly specialized Market-Making firms who service demand for direct execution from institutional end-users. Trades in 1,000 contracts and more can easily be executed in point-and-click trading by investors with direct market access. In HY1 2015, daily electronic trading volume in Bund, Bobl and Schatz Options was over 90,000 contracts. Over the past three years, the share of book volume in Bund Options increased from about 20 percent and in 2015 maintained a share of 33 percent. The share of book volume in Bobl Options doubled from 10 to 20 percent in 2014. Likewise, in 2015. up to 25 percent of volume of Schatz Options is executed electronically. Options not only trade as calls and puts, but also as options strategies. In November 2013, Eurex launched a bespoke Market-Making program for option strategies that is increasingly attracting volume directly from the execution of orders against the quotes provided by Market Makers. In 2015, we now see a daily average of 5,000 fixed income option contracts trading against Market Maker quotes in option strategies. As in trading outright calls and puts, mid-market trading with limit orders is also prevalent in option strategies. Since the end of 2013, strategy volume increased both due to higher usage of strategy entries for block trades as well as higher screen volumes following the introduction of the strategy Market-Making program. In 2015, daily order book volume in strategies rose to 32,000 contracts in fixed income options. Overall, strategy trading comprises about 30 percent of volume both in order book and off-book trading. In addition to quoting option strategies, Market Makers also stream permanent prices. Thus liquidity is provided for a vast range of strategies. Strategy order books are typically quoted for 500 to 1,000 contracts on the inside market depending upon the risk profile of the option strategy in question. Interestingly, strategy quotes are frequently tighter than the cumulative spread from single-handedly executing the legs individually. This correctly reflects the risk profile of option strategies, and also translates into lower implicit transaction costs for investors who only need to cross one bidoffer spread. SubnavigationInterest Rate Derivatives Fixed Income Trading Strategies. eurex 1 Interest Rate Derivatives Fixed Income Trading Strategies eurex 2 Please note The definitions of basis and cost of carry have been changed in this version of the brochure. In the previous version, the following definitions were used: Basis Futures Price Price of Cash Instrument Cost of Carry Basis In this version, the following definitions are used: Basis Price of Cash Instrument Futures Price Cost of Carry Basis These changes have been made in order to ensure that definitions of both items are consistent throughout Eurex materials, including the Trader Examination and corresponding preparatory materials. 3 Interest Rate Derivatives Fixed Income Trading Strategies eurex 4 Contents Brochure Structure and Objectives Characteristics of Fixed Income Securities Bonds Definition 08 Lifetime and Remaining Lifetime 09 Nominal and Actual Rate of Interest (Coupon and Yield) 09 Accrued Interest 10 The Yield Curve 11 Bond Valuation 14 Macaulay Duration 16 Modified Duration 16 Convexity the Tracking Error of Duration Eurex Fixed Income Derivatives 18 Characteristics of Exchange-Traded Financial Derivatives 18 Introduction 18 Flexibility 18 Transparency and Liquidity 18 Leverage Effect Introduction to Fixed Income Futures 19 What are Fixed Income Futures Definition 19 Futures Positions Obligations 20 Settlement or Closeout 21 Contract Specifications 22 Eurex Fixed Income Futures Overview 22 Futures Spread Margin and Additional Margin 23 Variation Margin 24 The Futures Price Fair Value 26 Cost of Carry and Basis 27 Conversion Factor (Price Factor) and Cheapest-to-Deliver (CTD) Bond 28 Identifying the Cheapest-to-Deliver Bond 5 Applications of Fixed Income Futures 32 Trading Strategies 32 Basic Futures Strategies 33 Long Positions ( Bullish Strategies) 35 Short Positions ( Bearish Strategies) 36 Spread Strategies 37 Time Spread 38 Inter-Product Spread 40 Hedging Strategies 41 Choice of the Futures Contract 41 Perfect Hedge versus Cross Hedge 41 Hedging Considerations 42 Determining the Hedge Ratio 43 Nominal Value Method 43 Modified Duration Method 45 Sensitivity Method 47 Static and Dynamic Hedging 47 Cash-and-Carry Arbitrage Introduction to Options on Fixed Income Futures 49 Options on Fixed Income Futures Definition 49 Options on Fixed Income Futures Rights and Obligations 50 Closeout 50 Exercising Options on Fixed Income Futures 51 Contract Specifications Options on Fixed Income Futures 52 Premium Payment and Risk Based Margining 54 Options on Fixed Income Futures Overview 6 Option Price 55 Components 55 Intrinsic Value 55 Time Value 56 Determining Factors 56 Volatility of the U nderlying Instrument 56 Remaining Lifetime of the Option 57 Influencing Factors Important Risk Parameters Greeks 58 Delta 60 Gamma 61 Vega (Kappa) 61 Theta Trading Strategies for Options on Fixed Income Futures 62 Long Call 63 Short Call 65 Long Put 66 Short Put 67 Bull Call Spread 68 Bear Put Spread 69 Long Straddle 71 Long Strangle 72 Impact of Time Value Decay and Volatility 72 Time Value Decay 73 Impact of Fluctuations in Market Volatility 74 Trading Volatility Maintaining a Delta-Neutral Position with Futures Hedging Strategies 77 Hedging Strategies for a Fixed Time Horizon 79 Delta Hedging 80 Gamma Hedging 82 Zero Cost Collar 7 FuturesOptions Relationships, Arbitrage Strategies 83 Synthetic Fixed Income Options and Futures Positions 83 Synthetic Long Call 85 Synthetic Short Call 86 Synthetic Long Put 88 Synthetic Short Put 88 Synthetic Long FutureReversal 90 Synthetic Short FutureConversion 91 Synthetic Options and Futures Positions Overview Glossary 92 Appendix 1: Valuation Form ulae and Indicators 100 Single-Period Remaining Lifetime 100 Multi-Period Remaining Lifetime 100 Macaulay Duration 101 Convexity Appendix 2: Conversion Factors 102 Bonds Denominated in Euros 102 Bonds Denominated in Swiss Francs Appendix 3: List of Diagrams Contacts 105 Further Information 8 Brochure Structure and Objectives This brochure describes the fixed income derivatives traded at Eurex and illustrates some of their most significant applications. These contracts are comprised of futures on fixed income securities ( fixed income futures ) and options on fixed income futures. To provide a better understanding of the contracts described, the fundamental characteristics of fixed income securities and the indicators used to analyze them will be outlined. Basic knowledge of the securities industry is a prerequisite. Explanations of fixed income securities contained in this brochure predominantly refer to such issues on which Eurex fixed income derivatives are based. 6 9 Characteristics of Fixed Income Securities Bonds Definition A bond can be described as large-scale borrowing on the capital market, whereby the creditor s entitlements are certified in the form of securities. The offerings of securities are known as issues and the respective debtor as the issuer. Bonds are categorized according to their lifetime, issuer, interest payment details, credit rating and other factors. Fixed income bonds bear a fixed interest payment, known as the coupon, which is based on the nominal value of the bond. Depending on the specifications, interest payment is usually semi-annual or annual. Fixed income derivatives traded at Eurex are based on a basket of either German or Swiss fixed income public sector bonds. In Switzerland, the Swiss National Bank (SNB) manages the borrowing requirements for the Swiss Federal Finance Administration. Capital is raised by issuing so-called money market book-entry claims as well as Treasury Notes and Confederation Bonds. Only the Confederation Bonds with different lifetimes are freely tradable. Other government bonds are exchanged only between the SNB and banks, or in interbank trading. The German Finance Agency (Bundesrepublik Deutschland Finanzagentur GmbH) has been responsible for issuing German Government Bonds (on behalf of the German Government) since June Other publicly tradable issues include bonds issued up until 1995 by the former Treuhandanstalt privatization agency and the German Federal Government s special funds, for example, the German Unity Fund. These bonds are attributed the same creditworthiness as a result of the assumption of liability by the Federal Republic of Germany. German government issues relevant to the Eurex fixed income derivatives have the following lifetimes and coupon payment details. Government issues Lifetime Coupon payment German Federal Treasury Notes 2 years Annual (Bundesschatzanweisungen) German Federal Debt Obligations 5 years Annual (Bundesobligationen) German Government Bonds 10 and 30 years Annual (Bundesanleihen) The terms of these issues do not provide for early redemption by calling in or drawing. 1 1 Cf. Deutsche Bundesbank, Der Markt fuumlr deutsche Bundeswertpapiere (The German Government securities market), 2nd edition, FrankfurtMain, 10 In this chapter the following information will be used for a number of explanations and calculations: Example: Debt security issue German Government Bond. by the issuer Federal Republic of Germany. at the issue date July 5, with a lifetime of 10 years. a redemption date on July 4, a fixed interest rate of 4.5. coupon payment annual. a nominal value of 100 Lifetime and Remaining Lifetime One must differentiate between lifetime and remaining lifetime in order to understand fixed income bonds and related derivatives. The lifetime denotes the time period from the time of issue until the nominal value of the security is redeemed, while the remaining lifetime is the remaining time period from the valuation date until redemption of securities already issued. Example: The bond has a lifetime of as at the valuation date the remaining lifetime is 10 years March 11, 2002 ( today ) 9 years and 115 days 8 11 Nominal and Actual Rate of Interest (Coupon and Yield) The nominal interest rate of a fixed income bond is the value of the coupon relative to the nominal value of the security. In general, neither the issue price nor the traded price of a bond corresponds to its nominal value. Instead, bonds are traded below or above par i. e. their value is below or above the nominal value of 100 percent. Both the coupon payments and the actual capital invested are taken into account when calculating the yield. This means that, unless the bond is traded at exactly 100 percent, the actual rate of interest in other words: the yield deviates from the nominal rate of interest. The actual rate of interest is lower (higher) than the nominal rate of interest for a bond trading above (below) its nominal value. Example: The bond has. a nominal value of but is trading at a price of a fixed interest rate of 4.5. a coupon of 4.5 100 a yield of 4.17 2 In this case the bond s yield is lower than the nominal rate of interest. Accrued Interest When a bond is issued, it may be subsequently bought and sold many times in between the predetermined future coupon dates. As such the buyer pays the seller the interest accrued up to the value date of the transaction, as heshe will receive the full coupon at the next coupon payment date. The interest accrued from the last coupon payment date up to the valuation date is referred to as the accrued interest. Example: The bond is purchased on March 11, 2002 ( today ) The interest is paid annually, on July 4 The coupon rate is 4.5 The time period since the last coupon 250 days 3 payment is This results in accrued interest of 4.5 250365 3.08 2 At this point, we have not yet covered exactly how yields are calculated: for this purpose, we need to take a closer look at the concepts of present value and accrued interest, which we will cover in the following sections. 3 Based on actualactual. 9 12 The Yield Curve Bond yields are largely dependent on the issuer s creditworthiness and the remaining lifetime of the issue. Since the underlying instruments of Eurex fixed income derivatives are government issues with top-quality credit ratings, the explanations below focus on the correlation between yield and remaining lifetime. These are often presented as a mathematical function the so-called yield curve. Due to their long-term capital commitment, bonds with a longer remaining lifetime generally tend to yield more than those with a shorter remaining lifetime. This is called a normal yield curve. A flat yield curve is where all remaining lifetimes have the same rate of interest. An inverted yield curve is characterized by a downwards-sloping curve. Yield Curves Yield Remaining lifetime Inverted yield curve Flat yield curve Normal yield curve 10 13 Bond Valuation In the previous sections, we saw that bonds carry a certain yield for a certain remaining lifetime. These yields may be calculated using the bond s market value (price), coupon payments and redemption (cash flows). At which market value (price) does the bond yield (actual rate of interest) correspond to prevailing market yields In the following examples, for clarification purposes, a uniform money market rate (EURIBOR) is used to represent the market interest rate, although this does not truly reflect circumstances on the capital market. A bond with annual coupon payments maturing in exactly one year s time is used for this step-by-step explanation. The coupon and the nominal value are repaid at maturity. Example: Money market interest rate p. a. 3.63 Bond 4.5 Federal Republic of Germany debt security due on July 10, 2003 Nominal value 100 Coupon 4.5 100 4.50 Valuation date July 11, 2002 ( today ) This results in the following equation: 4 Present value Nominal value (n) Coupon (c) Money market rate (r) To determine the present value of a bond, the future payments are divided by the yield factor (1 Money market interest rate). This calculation is referred to as discounting the cash flow. The resulting price is called the present value, since it is generated at the current point in time ( today ). The following example shows the future payments for a bond with a remaining lifetime of three years. 4 Cf. Appendix 1 for general formulae. 11 14 Example: Money market interest rate p. a. 3.63 Bond 4.5 Federal Republic of Germany debt security due on July 11, 2005 Nominal value 100 Coupon 4.5 100 4.50 Valuation date July 12, 2002 ( today ) The bond price can be calculated using the following equation: Present value Coupon (c1) Coupon (c2) Nominal value (n) Coupon (c3) Yield factor (Yield factor) 2 (Yield factor) Present value ( ) ( ) 2 ( ) 3 When calculating a bond for a date that does not coincide with the coupon payment date, the first coupon needs to be discounted only for the remaining lifetime up until the next coupon payment date. The exponentiation of the yield factor until the bond matures changes accordingly. Example: Money market interest rate p. a. 3.63 Bond 4.5 Federal Republic of Germany debt security due on July 4, 2011 Nominal value 100 Coupon 4.5 100 4.50 Valuation date March 11, 2002 ( today ) Remaining lifetime for the first coupon 115 days or 115 365 years Accrued interest 4.5 250365 3.08 The annualized interest rate is calculated, on a pro-rata basis, for terms of less than one year. The discount factor is: ( ) The interest rate needs to be raised to a higher power for remaining lifetimes beyond one year (1.315, 2.315, years). This is also referred to as compounding the interest. Accordingly, the bond price is: Present value ( ) ( ) ( ) 15 The discount factor for less than one year is also raised to a higher power for the purpose of simplification. 5 The previous equation can be interpreted in such a way that the present value of the bond equals the sum of its individual present values. In other words, it equals the aggregate of all coupon payments and the repayment of the nominal value. This model can only be used over more than one time period if a constant market interest rate is assumed. The implied flat yield curve tends not to reflect reality. Despite this simplification, determining the present value with a flat yield curve forms the basis for a number of risk indicators. These are described in the following chapters. One must differentiate between the present value ( dirty price ) and the clean price when quoting bond prices. According to prevailing convention, the traded price is the clean price. The clean price can be determined by subtracting the accrued interest from the dirty price. It is calculated as follows: Clean price Present value Accrued interest Clean price The following section differentiates between a bond s present value and a bond s traded price ( clean price ). A change in market interest rates has a direct impact on the discount factors and hence on the present value of bonds. Based on the example above, this results in the following present value if interest rates increase by one percentage point from 3.63 percent to 4.63 percent: Present value ( ) ( ) ( ) The clean price changes as follows: Clean price An increase in interest rates led to a fall of 7.06 percent in the bond s present value from to The clean price, however, fell by 7.26 percent, from to The following rule applies to describe the relationship between the present value or the clean price of a bond and interest rate developments: Bond prices and market yields react inversely to one another. 5 Cf. Appendix 1 for general formulae. 13 16 Macaulay Duration In the previous section, we saw how a bond s price was affected by a change in interest rates. The interest rate sensitivity of bonds can also be measured using the concepts of Macaulay duration and modified duration. The Macaulay duration indicator was developed to analyze the interest rate sensitivity of bonds, or bond portfolios, for the purpose of hedging against unfavorable interest rate changes. As was previously explained, the relationship between market interest rates and the present value of bonds is inverted: the immediate impact of rising yields is a price loss. Yet, higher interest rates also mean that coupon payments received can be reinvested at more profitable rates, thus increasing the future value of the portfolio. The Macaulay duration, which is usually expressed in years, reflects the period at the end of which both factors are in balance. It can thus be used to ensure that the sensitivity of a portfolio is in line with a set investment horizon. Note that the concept is based on the assumption of a flat yield curve, and a parallel shift in the yield curve where the yields of all maturities change in the same way. Macaulay duration is used to summarize interest rate sensitivity in a single number: changes in the duration of a bond, or duration differentials between different bonds help to gauge relative risks. The following fundamental relationships describe the characteristics of Macaulay duration: Macaulay duration is lower, the shorter the remaining lifetime the higher the market interest rate and the higher the coupon. Note that a higher coupon actually reduces the riskiness of a bond, compared to a bond with a lower coupon: this is indicated by lower Macaulay duration. The Macaulay duration of the bond in the previous example is calculated as follows: 14 17 Example Valuation date March 11, 2002 Security 4.5 Federal Republic of Germany debt security due on July 4, 2011 Money market rate p. a. 3.63 Bond price Calculation: ( ) Macaulay duration ( ) ( ) Macaulay duration 7.65 years The 0.315, 1.315, factors apply to the remaining lifetimes of the coupons and the repayment of the nominal value. The remaining lifetimes are multiplied by the present value of the individual repayments. Macaulay duration is the aggregate of remaining term of each cash flow, weighted with the share of this cash flow s present value in the overall present value of the bond. Therefore, the Macaulay duration of a bond is dominated by the remaining lifetime of those payments with the highest present value. Macaulay Duration (Average Remaining Lifetime Weighted by Present Value) Present value multiplied by maturity of cash flow Years Weights of individual cash flows Macaulay duration 7.65 years Macaulay duration can also be applied to bond portfolios by accumulating the duration values of individual bonds, weighted according to their share of the portfolio s present value. 15 18 Modified Duration The modified duration is built on the concept of the Macaulay duration. The modified duration reflects the percentage change in the present value (clean price plus accrued interest) given a one unit (one percentage point) change in the market interest rate. The modified duration is equivalent to the negative value of the Macaulay duration, discounted over a period of time: Modified duration Duration 1 Yield The modified duration for the example above is: Modified duration 7.65 7.38 According to the modified duration model, a one percentage point rise in the interest rate should lead to a 7.38 percent fall in the present value. Convexity the Tracking Error of Duration Despite the validity of the assumptions referred to in the previous section, calculating the change in value by means of the modified duration tends to be imprecise due to the assumption of a linear correlation between the present value and interest rates. In general, however, the priceyield relationship of bonds tends to be convex, and therefore, a price increase calculated by means of the modified duration is under - or overestimated, respectively. Relationship between Bond Prices and Capital Market Interest Rates P 0 16 Present value Market interest rate (yield) r 0 Priceyield relationship using the modified duration model Actual priceyield relationship Convexity error 19 In general, the greater the changes in the interest rate, the more imprecise the estimates for present value changes will be using modified duration. In the example used, the new calculation resulted in a fall of 7.06 percent in the bond s present value, whereas the estimate using the modified duration was 7.38 percent. The inaccuracies resulting from non-linearity when using the modified duration can be corrected by means of the so-called convexity formula. Compared to the modified duration formula, each element of the summation in the numerator is multiplied by (1 t c1 ) and the given denominator by (1 t r c1 ) 2 when calculating the convexity factor. The calculation below uses the same previous example: ( ) ( ) ( ) ( ) Convexity ( ) ( ) ( ) This convexity factor is used in the following equation: Percentage present value change of bond Modified duration Change in market rates Convexity (Change in market rates) 2 An increase in the interest rate from 3.63 percent to 4.63 percent would result in: Percentage present value change of bond 7.38 (0.01) (0.01) 2 7.03 The results of the three calculation methods are compared below: Calculation method: Results Recalculating the present value 7.06 Projection using modified duration 7.38 Projection using modified duration and 7.03 convexity This illustrates that taking the convexity into account provides a result similar to the price arrived at in the recalculation, whereas the estimate using the modified duration deviates significantly. However, one should note that a uniform interest rate was used for all remaining lifetimes (flat yield curve) in all three examples. 17 20 Eurex Fixed Income Derivatives Characteristics of Exchange-Traded Financial Derivatives Introduction Contracts for which the prices are derived from underlying cash market securities or commodities (which are referred to as underlying instruments or underlyings ) such as equities, bonds or oil, are known as derivative instruments or simply derivatives. Trading derivatives is distinguished by the fact that settlement takes place on specific dates (settlement date). Whereas payment against delivery for cash market transactions must take place after two or three days (settlement period), exchange-traded futures and options contracts, with the exception of exercising options, may provide for settlement on just four specific dates during the year. Derivatives are traded both on organized derivatives exchanges such as Eurex and in the over-the-counter (OTC) market. For the most part, standardized contract specifications and the process of marking to market or margining via a clearing house distinguish exchange-traded products from OTC derivatives. Eurex lists futures and options on financial instruments. Flexibility Organized derivatives exchanges provide investors with the facilities to enter into a position based on their market perception and in accordance with their appetite for risk, but without having to buy or sell any securities. By entering into a counter transaction they can neutralize ( close out ) their position prior to the contract maturity date. Any profits or losses incurred on open positions in futures or options on futures are credited or debited on a daily basis. Transparency and Liquidity Trading standardized contracts results in a concentration of order flows thus ensuring market liquidity. Liquidity means that large amounts of a product can be bought and sold at any time without excessive impact on prices. Electronic trading on Eurex guarantees extensive transparency of prices, volumes and executed transactions. Leverage Effect When entering into an options or futures trade, it is not necessary to pay the full value of the underlying instrument up front. Hence, in terms of the capital invested or pledged, the percentage profit or loss potential for these forward transactions is much greater than for the actual bonds or equities. 18 21 Introduction to Fixed Income Futures What are Fixed Income Futures Definition Fixed income futures are standardized forward transactions between two parties, based on fixed income instruments such as bonds with coupons. They comprise the obligation. to purchase Buyer Long future Long future. or to deliver Seller Short future Short future. a given financial Underlying German Swiss Confederation instrument instrument Government Bonds Bonds. with a given years 8-13 years remaining lifetime in a set amount Contract size EUR 100,000 CHF 100,000 nominal nominal. at a set point Maturity March 10, 2002 March 10, 2002 in time. at a determined Futures price price Eurex fixed income derivatives are based upon the delivery of an underlying bond which has a remaining maturity in accordance with a predefined range. The contract s deliverable list will contain bonds with a range of different coupon levels, prices and maturity dates. To help standardize the delivery process the concept of a notional bond is used. See the section below on contract specification and conversion factors for more detail. Futures Positions Obligations A futures position can either be long or short. Long position Buying a futures contract The buyer s obligations: At maturity, a long position automatically results in the obligation to buy deliverable bonds: The obligation to buy the interest rate instrument relevant to the contract on the delivery date at the pre-determined price. Short position Selling a futures contract The seller s obligations: At maturity, a short position automatically results in the obligation to deliver such bonds: The obligation to deliver the interest rate instrument relevant to the contract on the delivery date at the pre-determined price. 19 22 Settlement or Closeout Futures are generally settled by means of a cash settlement or by physically delivering the underlying instrument. Eurex fixed income futures provide for the physical delivery of securities. The holder of a short position is obliged to deliver either long-term Swiss Confederation Bonds or short-, medium - or long-term German Government debt securities, depending on the traded contract. The holder of the corresponding long position must accept delivery against payment of the delivery price. Securities of the respective issuers whose remaining lifetime on the futures delivery date is within the parameters set for each contract, can be delivered. These parameters are also known as the maturity ranges for delivery. The choice of bond to be delivered must be notified (the notification obligation of the holder of the short position). The valuation of a bond is described in the section on Bond Valuation. However, it is worth noting that when entering into a futures position it is not necessarily based upon the intention to actually deliver, or take delivery of, the underlying instruments at maturity. For instance, futures are designed to track the price development of the underlying instrument during the lifetime of the contract. In the event of a price increase in the futures contract, an original buyer of a futures contract is able to realize a profit by simply selling an equal number of contracts to those originally bought. The reverse applies to a short position, which can be closed out by buying back futures. As a result, a noticeable reduction in the open interest (the number of open long and short positions in each contract) occurs in the days prior to maturity of a bond futures contract. Whilst during the contract s lifetime, open interest may well exceed the volume of deliverable bonds available, this figure tends to fall considerably as soon as open interest starts shifting from the shortest delivery month to the next, prior to maturity (a process known as rollover ). 20 23 Contract Specifications Information on the detailed contract specifications of fixed income futures traded at Eurex can be found in the Eurex Products brochure or on the Eurex website The most important specifications of Eurex fixed income futures are detailed in the following example based on Euro Bund Futures and CONF Futures. A trader buys: 2 Contracts The futures transaction is based on a nominal value of 2 x EUR 100,000 of deliverable bonds for the Euro Bund Future, or 2 x CHF 100,000 of deliverable bonds for the CONF Future. June 2002 Maturity month The next three quarterly months within the cycle MarchJuneSeptemberDecember are available for trading. Thus, the Euro Bund and CONF Futures have a maximum remaining lifetime of nine months. The Last Trading Day is two exchange trading days before the 10th calendar day (delivery day) of the maturity month. Euro Bund or Underlying instrument The underlying instrument for Euro Bund Futures CONF Futures, is a 6 notional long-term German Government respectively Bond. For CONF Futures it is a 6 notional Swiss Confederation Bond. at or Futures price The futures price is quoted in percent, to two. decimal points, of the nominal value of the respectively underlying bond. The minimum price change (tick) is EUR or CHF (0.01). In this example, the buyer is obliged to buy either German Government Bonds or Swiss Confederation Bonds, which are included in the basket of deliverable bonds, to a nominal value of EUR or CHF 200,000, in June 24 Eurex Fixed Income Futures Overview The specifications of fixed income futures are largely distinguished by the baskets of deliverable bonds that cover different maturity ranges. The corresponding remaining lifetimes are set out in the following table: Underlying instrument: Nominal Remaining lifetime of Product code German Government debt contract value the deliverable bonds securities Euro Schatz Future EUR 100, 4 to 2 1 4 years FGBS Euro Bobl Future EUR 100, 2 to 5 1 2 years FGBM Euro Bund Future EUR 100, 2 to 10 1 2 years FGBL Euro Buxl Future EUR 100, to 30 1 2 years FGBX Underlying instrument: Nominal Remaining lifetime of Product code Swiss Confederation Bonds contract value the deliverable bonds CONF Future CHF 100,000 8 to 13 years CONF Futures Spread Margin and Additional Margin When a futures position is created, cash or other collateral is deposited with Eurex Clearing AG the Eurex clearing house. Eurex Clearing AG seeks to provide a guarantee to all clearing members in the event of a member defaulting. This Additional Margin deposit is designed to protect the clearing house against a forward adverse price movement in the futures contract. The clearing house is the ultimate counterparty in all Eurex transactions and must safeguard the integrity of the market in the event of a clearing member default. Offsetting long and short positions in different maturity months of the same futures contract are referred to as time spread positions. The high correlation of these positions means that the spread margin rates are lower than those for Additional Margin. Additional Margin is charged for all non-spread positions. Margin collateral must be pledged in the form of cash or securities. A detailed description of margin requirements calculated by the Eurex clearing house (Eurex Clearing AG) can be found in the brochure on Risk Based Margining. 22 25 Variation Margin A common misconception regarding bond futures is that when delivery of the actual bonds are made, they are settled at the original opening futures price. In fact delivery of the actual bonds is made using a final futures settlement price (see the section below on conversion factor and delivery price). The reason for this is that during the life of a futures position, its value is marked to market each day by the clearing house in the form of Variation Margin. Variation Margin can be viewed as the futures contract s profit or loss, which is paid and received each day during the life of an open position. The following examples illustrate the calculation of the Variation Margin, whereby profits are indicated by a positive sign, losses by a negative sign. Calculating the Variation Margin for a new long futures position: Futures Daily Settlement Price Futures purchase or selling price Variation Margin The Daily Settlement Price of the CONF Future in our example is The contracts were bought at a price of Example CONF Variation Margin: CHF 121,650 (121.65 of CHF 100,000) CHF 121,500 (121.50 of CHF 100,000) CHF 150 On the first day, the buyer of the CONF Future makes a profit of CHF 150 per contract (0.15 percent of the nominal value of CHF 100,000), that is credited via the Variation Margin. Alternatively the calculation can be described as the difference between 15 ticks. The futures contract is based upon CHF 100,000 nominal of bonds, so the value of a small price movement (tick) of CHF 0.01 equates to CHF 10 (i. e. 1, ). This is known as the tick value. Therefore the profit on the one futures trade is 15 CHF 10 1 CHF 26 The same process applies to the Euro Bund Future. The Euro Bund Futures Daily Settlement Price is It was bought at The Variation Margin calculation results in the following: Example Long Euro Bund Variation Margin: EUR 105,700 (105.70 of EUR 100,000) EUR 106,000 (106.00 of EUR 100,000) EUR 300 The buyer of the Euro Bund Futures incurs a loss of EUR 300 per contract (0.3 percent of the nominal value of EUR 100,000), that is consequently debited by way of Variation Margin. Alternatively 30 ticks loss multiplied by the tick value of one bund future (EUR 10) EUR 300. Calculating the Variation Margin during the contract s lifetime: Futures Daily Settlement Price on the current exchange trading day Futures Daily Settlement Price on the previous exchange trading day Variation Margin Calculating the Variation Margin when the contract is closed out: Futures price of the closing transaction Futures Daily Settlement Price on the previous exchange trading day Variation Margin The Futures Price Fair Value While the chapter quotBond Valuation focused on the effect of changes in interest rate levels on the present value of a bond, this section illustrates the relationship between the futures price and the value of the corresponding deliverable bonds. A trader who wishes to acquire bonds on a forward date can either buy a futures contract today on margin, or buy the cash bond and hold the position over time. Buying the cash bond involves an actual financial cost which is offset by the receipt of coupon income (accrued interest). The futures position on the other hand, over time, has neither the financing costs nor the receipts of an actual long spot bond position (cash market). 24 27 Therefore to maintain market equilibrium, the futures price must be determined in such a way that both the cash and futures purchase yield identical results. Theoretically, it should thus be impossible to realize risk-free profits using counter transactions on the cash and forward markets (arbitrage). Both investment strategies are compared in the following table: Time Period Futures purchase Cash bond purchase investmentvaluation investmentvaluation Today Entering into a futures position Bond purchase (market price (no cash outflow) plus accrued interest) Futures Investing the equivalent value of Coupon credit (if any) and lifetime the financing cost saved, on the money market investment of the money market equivalent value Futures Portfolio value Portfolio value delivery Bond (purchased at the futures Value of the bond including price) Income from the money accrued interest Any coupon market investment of the credits Any interest on the financing costs saved coupon income Taking the factors referred to above into account, the futures price is derived in line with the following general relationship: 6 Futures price Cash price Financing costs Proceeds from the cash position Which can be expressed mathematically as: 7 Futures price C t (C t c t t0 ) t r c T t c T t Whereby: C t Current clean price of the underlying security (at time t) c Bond coupon (percent actualactual for euro-denominated bonds) t 0 Coupon date t Value date t r c Short-term funding rate (percent actual360) T Futures delivery date T-t Futures remaining lifetime (days) 6 Readers should note that the formula shown here has been simplified for the sake of transparency specifically, it does not take into account the conversion factor, interest on the coupon income, borrowing costlending income or any diverging value date conventions in the professional cash market. 7 Please note that the number of days in the year (denominator) depends on the convention in the respective markets. Financing costs are usually calculated based on the money market convention (actual360), whereas the accrued interest and proceeds from the cash positions are calculated on an actualactual basis, which is the market convention for all euro-denominated government bonds. 25 28 Cost of Carry and Basis The difference between the proceeds from and the financing costs of the cash position coupon income is referred to as the cost of carry. The futures price can also be expressed as follows: 8 Price of the deliverable bond Futures price Cost of carry The basis is the difference between the bond price in the cash market (expressed by the prices of deliverable bonds) and the futures price, and is thus equivalent to the following: Price of the deliverable bond Futures price Basis The futures price is either lower or higher than the price of the underlying instrument, depending on whether the cost of carry is positive or negative. The basis diminishes with approaching maturity. This effect is called basis convergence and can be explained by the fact that as the remaining lifetime decreases, so do the financing costs and the proceeds from the bonds. The basis equals zero at maturity. The futures price is then equivalent to the price of the underlying instrument this effect is called basis convergence. Basis Convergence (Schematic) Negative Cost of Carry Positive Cost of Carry Price Time Price of the deliverable bond Futures price 0 The following relationships apply: Financing costs gt Proceeds from the cash position: gt Negative cost of carry Financing costs lt Proceeds from the cash position: gt Positive cost of carry 26 8 Cost of carry and basis are frequently shown in literature using a reverse sign. 29 Conversion Factor (Price Factor) and Cheapest-to-Deliver (CTD) Bond The bonds eligible for delivery are non-homogeneous although they have the same issuer, they vary by coupon level, maturity and therefore price. At delivery the conversion factor is used to help calculate a final delivery price. Essentially the conversion factor generates a price at which a bond would trade if its yield were six percent on delivery day. One of the assumptions made in the conversion factor formula is that the yield curve is flat at the time of delivery, and what is more, it is at the same level as that of the futures contract s notional coupon. Based on this assumption the bonds in the basket for delivery should be virtually all equally deliverable. Of course, this does not truly reflect reality: we will discuss the consequences below. The delivery price of the bond is calculated as follows: Delivery price Final Settlement Price of the future Conversion factor of the bond Accrued interest of the bond Calculating the number of interest days for issues denominated in Swiss francs and euros is different (Swiss francs: 30360 euros: actualactual), resulting in two diverging conversion factor formulae. These are included in the appendices. The conversion factor values for all deliverable bonds are displayed on the Eurex website The conversion factor (CF) of the bond delivered is incorporated as follows in the futures price formula (see p. 25 for an explanation of the variables used): Theoretical futures price 1 C t (C t c t t0 ) t r c T t c T t CF The following example describes how the theoretical price of the Euro Bund Future June 2002 is calculated. 27 30 Example: Trade date May 3, 2002 Value date May 8, 2002 Cheapest-to-deliver bond 3.75 Federal Republic of Germany debt security due on January 4, 2011 Price of the cheapest-to-deliver Futures delivery date June 10, 2002 Accrued interest 3.75 (124365) 100 1.27 Conversion factor of the CTD Money market rate p. a. 3.63 1 Theoretical futures price ( ) Theoretical futures price Theoretical futures price In reality the actual yield curve is seldom the same as the notional coupon level also, it is not flat as implied by the conversion factor formula. As a result, the implied discounting at the notional coupon level generally does not reflect the true yield curve structure. The conversion factor thus inadvertently creates a bias which promotes certain bonds for delivery above all others. The futures price will track the price of the deliverable bond that presents the short futures position with the greatest advantage upon maturity. This bond is called the cheapest to deliver (or CTD ). In case the delivery price of a bond is higher than its market valuation, holders of a short position can make a profit on the delivery, by buying the bond at the market price and selling it at the higher delivery price. They will usually choose the bond with the highest price advantage. Should a delivery involve any price disadvantage, they will attempt to minimize this loss. Identifying the Cheapest-to-Deliver Bond On the delivery day of a futures contract, a trader should not really be able to buy bonds in the cash bond market, and then deliver them immediately into the futures contract at a profit if heshe could do this it would result in a cash and carry arbitrage. We can illustrate this principle by using the following formula and examples. Basis Cash bond price (Futures price Conversion factor) 28 31 At delivery, basis will be zero. Therefore, at this point we can manipulate the formula to achieve the following relationship: Cash bond price Futures price Conversion factor This futures price is known as the zero basis futures price. The following table shows an example of some deliverable bonds (note that we have used hypothetical bonds for the purposes of illustrating this effect). At a yield of five percent the table records the cash market price at delivery and the zero basis futures price (i. e. cash bond price divided by the conversion factor) of each bond. Zero Basis Futures Price at 5 Yield Coupon Maturity Conversion factor Price at 5 yield Price divided by conversion factor 5 0715 0304 0513 We can see from the table that each bond has a different zero basis futures price, with the 7 05132011 bond having the lowest zero basis futures price of In reality of course only one real futures price exists at delivery. Suppose that at delivery the real futures price was If that was the case an arbitrageur could buy the cash bond (7 051302) at and sell it immediately via the futures market at and receive This would create an arbitrage profit of two ticks. Neither of the two other bonds would provide an arbitrage profit, however, with the futures at Accrued interest is ignored in this example as the bond is bought and sold into the futures contract on the same day. 29 32 It follows that the bond most likely to be used for delivery is always the bond with the lowest zero basis futures price the cheapest cash bond to purchase in the cash market in order to fulfill a short delivery into the futures contract, i. e. the CTD bond. Extending the example further, we can see how the zero basis futures prices change under different market yields and how the CTD is determined. Zero basis futures price at 5, 6, 7 yield Coupon Maturity Conversion Price Price Price Price Price Price factor at 5 CF at 6 CF at 7 CF 5 0715 0304 0513 The following rules can be deducted from the table above: If the market yield is above the notional coupon level, bonds with a longer duration (lower coupon given similar maturities longer maturity given similar coupons) will be preferred for delivery. If the market yield is below the notional coupon level, bonds with a shorter duration (higher coupon given similar maturitiesshorter maturity given similar coupons) will be preferred for delivery. When yields are at the notional coupon level (six percent) the bonds are almost all equally preferred for delivery. As we pointed out above, this bias is caused by the incorrect discount rate of six percent implied by the way the conversion factor is calculated. For example, when market yields are below the level of the notional coupon, all eligible bonds are undervalued in the calculation of the delivery price. This effect is least pronounced for bonds with a low duration as these are less sensitive to variations of the discount rate (market yield). 9 So, if market yields are below the implied discount rate (i. e. the notional coupon rate), low duration bonds tend to be cheapest-to-deliver. This effect is reversed for market yields above six percent. 9 Cf. chapters Macaulay Duration and Modified Duration. 30 33 The graph below shows a plot of the three deliverable bonds, illustrating how the CTD changes as the yield curve shifts. Identifying the CTD under Different Market Conditions CTD 7 05132011 CTD 5 0715 Zero basis futures price Market yield 6 7 5 07152012 6 03042012 7 0513 34 Applications of Fixed Income Futures There are three motives for using derivatives: trading, hedging and arbitrage. Trading involves entering into positions on the derivatives market for the purpose of making a profit, assuming that market developments are predicted correctly. Hedging means securing the price of an existing or planned portfolio. Arbitrage is exploiting price imbalances to achieve risk-free profits. To maintain the balance in the derivatives markets it is important that both traders and hedgers are active thus providing liquidity. Trades between hedgers can also take place, whereby one counterparty wants to hedge the price of an existing portfolio against price losses and the other the purchase price of a future portfolio against expected price increases. The central role of the derivatives markets is the transfer of risk between these market participants. Arbitrage ensures that the market prices of derivative contracts diverge only marginally and for a short period of time from their theoretically correct values. Trading Strategies Basic Futures Strategies Building exposure by using fixed income futures has the attraction of allowing investors to benefit from expected interest rate moves without having to tie up capital by buying bonds. For a simple futures position, contrary to investing on the cash market, only Additional Margin needs to be pledged (cf. chapter Futures Spread Margin and Additional Margin ). Investors incurring losses on their futures positions possibly as a result of incorrect market forecasts are obliged to settle these losses immediately, and in full ( Variation Margin). During the lifetime of the futures contract this could amount to a multiple of the amount pledged. The change in value relative to the capital invested is consequently much higher than for a similar cash market transaction. This is called the leverage effect. In other words, the substantial profit potential associated with a straight fixed income future position is reflected by the significant risks involved. 32 35 Long Positions ( Bullish Strategies) Investors expecting falling market yields for a certain remaining lifetime will decide to buy futures contracts covering this section of the yield curve. If the prediction turns out to be correct, a profit is made on the futures position. As is characteristic for futures contracts, the profit potential on such a long position is proportional to its risk exposure. In principle, the priceyield relationship of a fixed income futures contract corresponds to that of a portfolio of deliverable bonds. Profit and Loss Profile on the Last Trading Day, Long Fixed Income Futures 0 Profit and loss Bond price PL long fixed income futures Rationale The trader wants to benefit from a forecast development without tying up capital in the cash market. Initial Situation The trader assumes that yields on German Federal Debt Obligations (Bundesobligationen) will fall. Strategy The trader buys ten Euro Bobl Futures June 2002 at a price of. with the intention to close out the position during the contract s lifetime. If the price of the Euro Bobl Futures rises, the trader makes a profit on the difference between the purchase price and the higher selling price. Constant analysis of the market is necessary to correctly time the position exit by selling the contracts. 33 36 The calculation of Additional and Variation Margins for a hypothetical price development is illustrated in the following table. The Additional Margin is derived by multiplying the margin parameter, as set by Eurex Clearing AG (in this case EUR 1,000 per contract), by the number of contracts. Date Transaction Purchase Daily Variation Variation Additional selling price Settlement Margin 10 Margin Margin 11 Price profit in EUR loss in EUR in EUR 0311 Buy ,900 10,000 Euro Bobl Futures June ,700 03 ,100 03 ,400 03 ,100 03 ,200 0320 Sell ,500 Euro Bobl Futures June 21 10,000 Result ,600 5,900 0 Changed Market Situation: The trader closes out the futures position at a price of on March 20. The Additional Margin pledged is released the following day. Result: The proceeds of EUR 2,700 made on the difference between the purchase and sale is equivalent to the balance of the Variation Margin (EUR 8,600 EUR 5,900) calculated on a daily basis. Alternatively the net profit is the sum of the futures price movement multiplied by ten contracts multiplied by the point value of EUR 1,000: ( ) 10 EUR 1,000 EUR 2, Cf. chapter Variation Margin. 11 Cf. chapter Futures Spread Margin and Additional Margin. 34
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