Chapter 17

Treasury futures contracts

Chapter Summary

This chapter defines forward contracts and futures contracts. Differences between forwards and futures are then explained. Treasury futures contracts are then described and analyzed. The delivery options in Treasury (note and bond) futures contracts and their implications for delivery strategies and pricing are explained using concrete examples. Concepts such as basis, basis after carry (net basis), value of delivery options, and implied repo rate are explained with examples. We show how Treasury futures contracts can be used in hedging and risk management applications.

17.1 Forward Contracts Defined

An investor who buys (sells) a forward contract agrees to buy (sell) one unit of the underlying ...

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