When looking at treasure bond futures, there's a quoted price.

But upon delivery, the exact time of delivery, the accrued interest, and the delivered bond is unknown, so we cannot know the price we pay for the bond at delivery.

So what is the meaning of the quoted futures price? Is that just some approximation?


closed as off-topic by Helin, Alex C, LocalVolatility, amdopt, David Addison Mar 13 '18 at 22:44

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    $\begingroup$ Correct in that you don't know what price will be in the future. The whole point is that you lock in a price upfront, so that you can pay that locked-in price at the time of delivery, regardless of prevailing price. The price is determined based on standard no arbitrage pricing principles. $\endgroup$ – Helin Mar 13 '18 at 17:32
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    $\begingroup$ Also, if you multiply the quoted futures price by the conversion factor for a bond in the delivery basket, you get the price you have locked in for that bond on the delivery date. You still don't know which bond you will get. That is up to the party that is short the futures. $\endgroup$ – dm63 Mar 13 '18 at 20:31

The quoted price is based on the cheapest-to-deliver (CTD) criteria. This in turn is based on the premise that a rational seller would only deliver the cheapest bonds which are eligible for delivery. Not doing so would be detrimental to the seller's interest.

The CME Group has tabulated common conversion factors to convert known maturities into an expected bond price. See: http://www.cmegroup.com/trading/interest-rates/calculating-us-treasury-futures-conversion-factors.html

Also, there are many other questions on this network which address pricing of bond futures based on the CTD criteria. I recommend you simply search for "cheapest to deliver" for additional information.


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