Mastering Investment Banking Securities

10

Bond and equity derivatives

Introduction to bond derivatives

Background on equity markets

INTRODUCTION TO BOND DERIVATIVES

In Chapter 4 on capital markets instruments, we covered bonds as a primary source of long-term funding. However, they also play a very important role in interest rate derivatives markets. They are traded both on recognised exchanges and OTC. Typical exchange-traded bond derivatives are bond futures and bond options. Various types of options and repos (repurchase agreements) are traded OTC.

Pricing bond futures

A bond futures contract is an obligation to buy/deliver a specific amount of precisely defined bond at a future date at a price agreed today. The contract can be taken to delivery, or closed out before maturity, ...