How are bond futures prices adjusted?

[srinir]

Yes, if you buy bonds on margin, your return to the expiration of the bond is based on the coupon/discount you earn over the financing rate. GS can make money doing this, you can't.

Risk parity is balancing the risk contribution of all asset classes (Stocks, bonds, commodities, currencies). With out levering up, investor portfolio will be 75% bonds and rest in other asset classes. So the expected return will be very low.

If investor needs to some what similar to stock return, then they have to lever up the bonds. There is no other alternative. Investor can still make money (theoretically) since when bonds are not performing well, other asset classes makes up for it.

 

[Herkfsu]

We are because sle is discussed how many use bond futures like owning the cash bond and shorting the future. I was responding to being long a future. The Future pays no interest.

Future pays no interest, but is discounted by the coupon payments, so you are still getting the coupon in other ways. Is that wrong?

Yes, if you buy bonds on margin, your return to the expiration of the bond is based on the coupon/discount you earn over the financing rate. GS can make money doing this, you can't.

While I am not trying to do levered risk party via futures, I am trying to understand it. Whats so advanced about buying bond and equity futures?

That was a different example and not related to this. $2mm notional of 10-Year T-Note Futures = 20 futures. You need the margin for 20 futures.

How is it different? Margin requirements for 3mm is more than 1mm? I thought margin requirements for bond futures was less than 10%.

 

[Robert Morse]

Future pays no interest, but is discounted by the coupon payments, so you are still getting the coupon in other ways. Is that wrong?



While I am not trying to do levered risk party via futures, I am trying to understand it. Whats so advanced about buying bond and equity futures?



How is it different? Margin requirements for 3mm is more than 1mm? I thought margin requirements for bond futures was less than 10%.

Sorry, I just can't explain this in any other way. If you want to call me, I'm happy to explain. You just do not see the difference between owning a bond and taking delivery of one in the future and being at the risk of price change. They are not the same.

 

[Herkfsu]

But if you own the bond or own the future, you are at risk of price change in both cases, so i don't quite follow, sorry.

 

[Robert Morse]

But if you own the bond or own the future, you are at risk of price change in both cases, so i don't quite follow, sorry.

My phone number is below if you want to call me in the next 15 min or tomorrow.

 

[Robert Morse]

See attached.
"The futures contract will track the price of its underlying cash security. Also, since CBOT Treasury futures are not coupon bearing instruments and therefore do not have yields, they also reference the yield of that underlying cash security."

 

[Herkfsu]

I found a Bionic Turtle explanation. It was as I expected. The yield the futures holder "receives" is built into the discount that is applied to the forward price. I probably just didn't ask the question clearly.

 

[Herkfsu]

So I assume leveraged risk parity requires(or much prefers) a steep yield curve to be effective.

 

[sle]

Future pays no interest, but is discounted by the coupon payments, so you are still getting the coupon in other ways. Is that wrong?

Futures pays no interest, but (adjusted for the cost of financing) produces the same total return as the underlying security.