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I would like to model Korean government bond futures. So far I know two concepts (just a short, incomplete description)

  1. cash-settled futures (e.g. Australia): The average yield of a basket of bonds is calculated and thereby a notional bond price. Quotation in $100-yield$.
  2. bond futures with physical delivery (e.g. Germany, US): Conversion factors for all bonds in a basket can be calculated which leads (with some more inputs) to a cheapest-to-deliver and the futures price corresponds more or less to the forward price of the cheapest-to-deliver (taking into account the conversion factor).

If I read this document, taken from page of "Korea exchange", correctly then the Korean 3yr and 5yr futures belong to class (1) and the 10 yr belongs to class (2). But when I go to Bloomberg it seems that all three futures contracts are of class (1) - yield based, cash settled.

Are there any experts around for these markets? Is it true that all 3 futures contracts work the same way, namely yield based and cash settled?

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  • $\begingroup$ I would separate out the two concepts of quotation semantics, and cash / physical settlement. They are orthogonal. The Australian bond futures are quoted on a yield basis so as to better line up with the quoting conventions of the cash bond market, which is that way for historical reasons. Whether a bond future is cash or phsyically settled is based on whichever the exchange thinks will generate the most liquidity (trade volume and therefore fees). $\endgroup$
    – ThatDataGuy
    May 23, 2020 at 18:48

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Checking calculation with Bloomberg it seems that all 3 Korean bond futures contracts are of type (1). The pdf in the link must be out-dated.

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  • $\begingroup$ The link may indeed be old, but the exchange is always the authoratitive source for futures contracts rules. If its unclear, contact them. Bloomberg (and other data providers) can and do make mistakes. I have corrected them many times in my career. $\endgroup$
    – ThatDataGuy
    May 23, 2020 at 18:45

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