U.S. Treasury Futures 1.0

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1 U.S. Treasury Futures 1.0 Foundational Concepts January CME Group. All rights reserved.

2 Agenda 1 Delivery Process 2 Treasury Basis 3 Cheapest-to-deliver (CTD) 4 Measuring risk, BPV, Hedge Ratio (HR) 5 Review and Q&A 2018 CME Group. All rights reserved.

3 Disclaimer Futures trading is not suitable for all investors, and involves the risk of loss. Futures are a leveraged investment, and because only a percentage of a contract s value is required to trade, it is possible to lose more than the amount of money deposited for a futures position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles. And only a portion of those funds should be devoted to any one trade because they cannot expect to profit on every trade. All references to options refer to options on futures. Swaps trading is not suitable for all investors, involves the risk of loss and should only be undertaken by investors who are ECPs within the meaning of section 1(a)12 of the Commodity Exchange Act. Swaps are a leveraged investment, and because only a percentage of a contract s value is required to trade, it is possible to lose more than the amount of money deposited for a swaps position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles. And only a portion of those funds should be devoted to any one trade because they cannot expect to profit on every trade. Any research views expressed are those of the individual author and do not necessarily represent the views of the CME Group or its affiliates. CME Group is a trademark of CME Group Inc. The Globe Logo, CME, Globex and Chicago Mercantile Exchange are trademarks of Chicago Mercantile Exchange Inc. CBOT and the Chicago Board of Trade are trademarks of the Board of Trade of the City of Chicago, Inc. NYMEX, New York Mercantile Exchange and ClearPort are registered trademarks of New York Mercantile Exchange, Inc. COMEX is a trademark of Commodity Exchange, Inc. KCBOT, KCBT and Kansas City Board of Trade are trademarks of The Board of Trade of Kansas City, Missouri, Inc. All other trademarks are the property of their respective owners. The information within this presentation has been compiled by CME Group for general purposes only. CME Group assumes no responsibility for any errors or omissions. Additionally, all examples in this presentation are hypothetical situations, used for explanation purposes only, and should not be considered investment advice or the results of actual market experience. All matters pertaining to rules and specifications herein are made subject to and are superseded by official Exchange rules. Current rules should be consulted in all cases concerning contract specifications. Copyright 2018 CME Group. All rights reserved CME Group. All rights reserved.

4 U.S. Treasury Building, Washington DC 2018 CME Group. All rights reserved. 4

5 CME Group Interest Rate Products 3.50% 3.00% Eurodollars 0-10 Years Classic Long Bond Ultra Long Bond 30-Year MAC 2.50% Ultra 10-Year T-note 20-Year MAC 2.00% 10-Year T-note 10-Year MAC 1.50% 1.00% 0.50% 2-Year T-note 30-Day Fed Funds 0-3 Years 5-Year T-note 2-Year MAC 5-Year MAC 7-Year MAC CME Group Interest Rate futures include Fed Funds, Eurodollars, US Treasury, and Swap based products. 0.00% CME Group. All rights reserved. 5

6 Begin with the end in mind. Dr. Stephen R. Covey The Seven Habits of Highly Effective People 2018 CME Group. All rights reserved. 6

7 Anyone holding a position in an expiring Treasury futures contract during its delivery month must be prepared to fulfill the contractual obligation to deliver, or take delivery of, the underlying deliverable grade Treasury securities. For this reason delivery on the contract or the prospect of it is the chief determinant of prices at which Treasury futures trade. CME Group Publication, The U.S. Treasury Futures Delivery Process December CME Group. All rights reserved. 7

8 The Delivery Process Timeline First Position Day Last Trading Day Intention Day Notice Day Delivery Day Time 2018 CME Group. All rights reserved. 8

9 First Position Day (also First Intention Day) 2 business days prior to the 1 st business day of the delivery month. For example, for the March 2018 contracts, February 27, 2018 is First Position Day. Clearing firms obligated to report all open positions in USTs to the CME Clearing House. First day the short can give intention to deliver. (1 st Intention Day) 2018 CME Group. All rights reserved. 9

10 First Business Day of Delivery Month In US Treasury futures the Short position delivers to the Long position. The Short position has optionality: Quality option = What to deliver Timing option = When to deliver The Long is passive and can receive notice of delivery any day in the delivery month CME Group. All rights reserved. 10

11 Intention Day By 6:00 PM Clearing firms must report all open Longs to CH. By 6:00 PM the Short notifies its intention to deliver. By 10:00 PM Short is matched to oldest Long. Once this happens the process cannot be stopped CME Group. All rights reserved. 11

12 Notice Day 2:00 PM, (3:00 PM if Last Notice Day) based on previous days futures settlement price Short invoices Long based on issue. Short declares which security it will deliver. By 4:00 PM Long provides Short with its banking details CME Group. All rights reserved. 12

13 Delivery Day Long and Short have until 9:30 AM to resolve invoice differences. By 10:00 AM Short must have treasury security in the bank. The transfer to the Long must be completed by 1:00 PM. By 1:00 PM the Long has received security and Short has received funds CME Group. All rights reserved. 13

14 Delivery Calendar March 2018 U.S. Treasury Futures Contract Schedule LTD = last trading day LDD = last delivery day February / March / April 2018 Sunday Monday Tuesday Wednesday Thursday Friday Saturday st Position 1 st Intention Day st Business Day LTD Tens & Bonds LTD: 2s & 5s LDD: Tens & Bonds LDD: 2s & 5s CME Group. All rights reserved.

15 Delivery Day Treasury notes and bonds pay semiannual coupon interest on one of two schedules: 15 th of the month: February Quarterly - 15 Feb/15 Aug or 15 May/15 Nov Applies to bonds, and notes issued with 10-year original term to maturity. General form 15 Jan/15 Jul, 15 Feb/15 Aug 15 Jun/ 15 Dec. Applies to notes issued with 3-year original term to maturity. End of month: 31 Jan/31 Jul, 28 (or 29) Feb/ 31 Aug, 31 Mar/30 Sep Applies to notes issued with 2-year, 5-year, or 7-year original term to maturity CME Group. All rights reserved.

16 Why is knowing this so important? Because the concepts that go into the delivery drive the pricing and trading behavior of the futures contract. Coupon income Cost of carry Conversion Factor (CF) Basis & Net Basis Cheapest-to-deliver (CTD) 2018 CME Group. All rights reserved. 16

17 Why is knowing this so important? Because the concepts that go into the delivery drive the pricing and trading behavior of the futures contract. Contracts 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000, ,000 0 TYZ7 TYH8 Roll Position Day 1 st Business Day % of total OI Over 90% of Classic Ten-Year open positions rolled forward by first business of delivery month CME Group. All rights reserved. 17

18 Treasury Futures U.S. Treasuries quoted in percent of par (100) Quoted in increments of 1/32 nd of 1% of par or to ½ of 1/32 nd (1/64 th ) or even to ¼ of 1/32 nd (1/128 th ) Cash Market Quote Means Decimal Equivalent Futures Market Quote /32 nds % of par /32 nds + ¼ of 1/ % of par /32 nds + ½ of 1/ % of par /32 nds + ¾ of 1/ % of par CME Group. All rights reserved. 18

19 Treasury Futures 2-Year T-Note Futures 5-Year T-Note Futures 10-Year T-Note Futures Ultra 10-Year Note US Treasury T-Bond Futures Ultra T-Bond Futures Contract Size $200,000 facevalue $100,000 face-value Delivery Grade Notes with original maturity no greater than 5-1/4 years and remaining maturity no greater than 2 years but not less than 1 year, 9 months Notes with original maturity no greater than 5-1/4 years and remaining maturity of at least 4 years, 2 months Notes with remaining maturity of at least 6 years, 6 months but no more than 10 years Notes with remaining maturity of at least 9 years, 5- months but no more than 10 years Bonds with remaining maturity of at least 15 years, but less than 25 years Bonds with remaining maturity of at least 25 years Last Trading Day Last business day of quarterly contract month. 7 business days preceding last business day of quarterly contract month. Price Quote 1/4 th of 1/32 nd ($15.625) 1/4 th of 1/32 nd ($7.8125) ½ of 1/32 nd ($15.625) 1/32 nd ($31.25) 2018 CME Group. All rights reserved. 19

20 Deliverable baskets vs. September 2017 contracts as of 8/16/2017 Contract # of Eligible Issues Face Value of Deliverable Supplies 2-Year Note 10 $298 Billion 5-Year Note 9 $372 Billion 10-Year Note 19 $1,054 Billion Ultra 10-Year 3 $167 Billion Classic Bond 20 $742 Billion Ultra Bond 20 $818 Billion Source: U.S. Treasury Department 2018 CME Group. All rights reserved. 20

21 Deliverable basket ZNH7 (5-Year) contract as of 12/1/2016 Contract UST 5-Year Note DEC /7/2017 $100,000 Notional 58 days Coupon Maturity Price/32s YTM Mod Dur /28/ /31/ /30/ /31/ /30/ /31/ /31/ /30/ /31/ securities eligible for delivery with a combined outstanding face value of approximately $372 billion. Data Source: Bloomberg 2018 CME Group. All rights reserved. 21

22 2018 CME Group. All rights reserved. 22

23 Conversion factor invoicing system Is the means by which we can compare the basket of deliverable securities So we can determine relative value between the deliverable securities Because some will be more efficient or cheaper to deliver into the futures contract The issue with the lowest net basis is usually considered the cheapest to deliver (CTD) security CME Group. All rights reserved. 23

24 Conversion factor invoicing system May be thought of as the price of the security if its yield was 6%... Conversion factor is included in Principal Invoice Price at delivery Also used in calculating the basis between cash bonds/notes and futures CME Group. All rights reserved. 24

25 Treasury Basis Basis = Cash Price (Futures Price x CF) P futures Coupon Maturity Price/32s Pdecimal CF Pf x CF Basis = Pc - (Pf x CF) Basis/32s 2.000% 10/31/ Step 1: Convert prices from 1/32s to decimal P futures = (1/32s) = CF = , P f x CF = P cash = (1/32s) = Step 2: Do the math in decimal Basis = = Step 3: Convert back to 1/32s = ticks (1/32s) 2018 CME Group. All rights reserved. 25

26 Treasury Basis Basis = Cash Price (Futures Price x CF) Contract UST 5-Year Note DEC /7/2017 $100,000 Notional 58 days Coupon Maturity Price/32s P/decimal CF Pf x CF Basis/decimal Basis/32s /28/ /31/ /30/ /31/ /30/ /31/ /31/ /30/ /31/ Data Source: Bloomberg and CME Group 2018 CME Group. All rights reserved. 26

27 Treasury Basis Basis = Cash Price (Futures Price x CF) Long the Basis = long cash and short futures Size of short futures position determined by CF Short the Basis = short cash and long futures. CME Group Rule # 538 outlines EFP trades. Exchange For Physical ( EFP ) a privately negotiated and simultaneous exchange of an Exchange futures position for a corresponding cash position. Go to: cmegroup.com/clearing/trading-practices/efp-efr-eoo-trades.html 2018 CME Group. All rights reserved. 27

28 Treasury Basis ZNH7 (Ten-Year) Treasury futures (22 March 2017) Month Open High Low Settlement Volume Open Interest MAR ,670 JUN ,639,082 3,048,684 SEP A TOTAL 1,639,964 3,069,674 Treasury futures prices discount over time due to positive carry CME Group. All rights reserved. 28

29 Treasury Basis Carry is defined as: Carry = Coupon Income (CI) Financing Cost (FC) Positive and Negative Carry 60 Repo rates > coupon rate generally results in negative carry Negative Carry 0 Repo rates < coupon rate generally results in positive carry Positive Carry -60 t+0 t+1 t+2 t+3 t+4 t+5 t+6 t CME Group. All rights reserved. 29

30 Treasury Basis ZNZ7 (Ten-Year) Treasury futures (8 December 2017) Month Open High Low Settlement Volume Open Interest DEC ,952 91,968 MAR ,119,689 3,212,410 JUN TOTAL 1,136,641 3,304,378 Notice the tighter calendar rolls due to higher S-T interest rates CME Group. All rights reserved. 30

31 Repo Market $2.3 trillion daily turnover. Provides funding for dealer operations. Provides short-term investment s for excess cash. Approximately 50% of all Repos are overnight. Approximately 40% are US Treasuries. Source: SIFMA Repo Market Fact Sheet CME Group. All rights reserved. 31

32 Repo Market Long Treasuries (Dealer) Wants to borrow funds Lends USTs in exchange for ST funding Repo 2018 CME Group. All rights reserved. 32

33 Repo Market Short Treasuries (Dealer) Wants to borrow bonds Lends money ST in exchange for securities Reverse Repo 2018 CME Group. All rights reserved. 33

34 Repo Market Diagram of a Repurchase (Repo) trade Dealer Settlement Date Borrow money Lend securities Counterparty End of Term Pay back money + interest Take back securities Follow the money, when dealers lend securities they borrow money, they want lower rates (specials) CME Group. All rights reserved. 34

35 Repo Market Diagram of a Reserve Repurchase (Repo) trade Dealer Settlement Date Borrow securities Lend money Counterparty End of Term Send back securities Receive money + interest Follow the money, when dealers borrow securities they lend money, they want higher rates (GC) CME Group. All rights reserved. 35

36 Cost of Carry Carry is defined as: Carry = Coupon Income (CI) Financing Cost (FC) Let s take an example: 2.000% of 10/31/2022 priced at (1/32s) Settlement date = 11/7/2017 Next coupon payment date = April 30, 2018 Last coupon payment date = October 31, 2017 (issued) Last delivery date ZNZ7 futures = January 4, 2018 Repo Rate = 1.17%, days until delivery = 58 CI = $1,000 x (Coupon rate/2) x (days until delivery/days in coupon cycle) = $1000 x (2.00 / 2) x (58/181) = $ FC = (Price + Accrued Interest) x (RP / 100) x (days until delivery / 360) = ($100, $359.12) x (1.17 / 100) x (58/360) = $ CME Group. All rights reserved. 36

37 Cost of Carry Carry is defined as: Carry = Coupon Income Financing Cost CI = $1,000 x (Coupon rate/2) x (days until delivery/days in coupon cycle) = $1000 x (2.00 / 2) x (58/181) = $ FC = (Price + Accrued Interest) x (RP / 100) x (days until delivery / 360) = ($100, $359.12) x (1.17 / 100) x (58/360) = $ Carry = $ = $ = $ / (tick value per $100,000) = 4.10 ticks Positive Carry 2018 CME Group. All rights reserved. 37

38 Treasury Basis Carry = Coupon Income Financing Cost Contract UST 5-Year Note DEC /7/2017 $100,000 Notional 58 days Coupon Maturity Price/32s CF Basis/32s Carry /28/ /31/ /30/ /31/ /30/ /31/ /31/ /30/ /31/ Data Source: Bloomberg and CME Group 2018 CME Group. All rights reserved. 38

39 Treasury Basis Net Basis = Basis - Carry Contract UST 5-Year Note DEC /7/2017 $100,000 Notional 58 days Coupon Maturity Price/32s CF Basis/32s Carry Net Basis /28/ /31/ /30/ /31/ /30/ /31/ /31/ /30/ /31/ The security with the lowest net basis in generally considered the CTD security. Data Source: Bloomberg and CME Group 2018 CME Group. All rights reserved. 39

40 Treasury Basis Implied Repo Rate (IRR) Theoretical return you would obtain if you bought the cash bond, sold futures short against it, and then delivered the cash bond into the futures. Burghardt, Belton, The Treasury Bond Basis, 1994, Probus Publishing Used as another means to determine and UST futures contract s CTD security. Issue with the highest IRR is considered CTD CME Group. All rights reserved. 40

41 Treasury Basis Implied Repo Rate (IRR) The security with highest implied repo rate (IRR) is considered CTD. Contract UST 5-Year Note DEC /7/2017 $100,000 Notional 58 days Coupon Maturity Price/32s CF Basis/32s Carry Net Basis IRR /28/ /31/ /30/ /31/ /30/ /31/ /31/ /30/ /31/ CME Group. All rights reserved. 41

42 Treasury Futures Analytical Tools available on CMEGroup.com CME Group. All rights reserved. 42

43 Cheapest-to-deliver (CTD) As of August 16, 2017: CTD for September 2017 by contract: ZTH7 = 1.625% 6/30/2019 ZFH7 = 1.750% 11/30/2021 ZNH7 = 2.500% 5/15/2024 TNH7 = 2.250% 2/15/2027 ZBH7 = 4.500% 2/15/2036 UBH7 = 3.750% 11/15/2043 In the September 2017 cycle, by Last Delivery Day (LDD) all US Treasury contract short positions delivered the respective CTD security CME Group. All rights reserved. 43

44 Cheapest-to-deliver (CTD) However Ultra-Bond in September 2017: Date Contracts 18 Sept Sept Sept 1 29 Sept* 1,604 Total 2,641 The short decides when and what to deliver. *Last Delivery Day (LDD) 2018 CME Group. All rights reserved. 44

45 Registrar Reports CUSIPS Delivered for Financial Contracts U.S. TREASURY DELIVERIES 10/3/2017 CONTRACT DATE YEAR MONTH COUPON MATURITY CONTRACTS FACTOR CUSIP CBOT Ultra T-Bonds 18-Sep 2017 September 3.75% 11/15/ RD2 CBOT Ultra T-Bonds 19-Sep 2017 September 3.75% 11/15/ RD2 CBOT Ultra T-Bonds 20-Sep 2017 September 3.75% 11/15/ RD2 CBOT Ultra T-Bonds 29-Sep 2017 September 3.75% 11/15/2043 1, RD2 Total September Deliveries 2,641 CONTRACT DATE YEAR MONTH COUPON MATURITY CONTRACTS FACTOR CUSIP CBOT 30-Year T-Bonds 29-Sep 2017 September 4.50% 2/15/2036 3, FT0 Total September Deliveries 3,456 CONTRACT DATE YEAR MONTH COUPON MATURITY CONTRACTS FACTOR CUSIP CBOT Ultra 10-Year T-Notes 18-Sep 2017 September 2.25% 2/15/ V98 CBOT Ultra 10-Year T-Notes 29-Sep 2017 September 2.25% 2/15/ V98 Total September Deliveries 630 CONTRACT DATE YEAR MONTH COUPON MATURITY CONTRACTS FACTOR CUSIP CBOT 10-Year T-Notes 29-Sep 2017 September 2.50% 5/15/ , WJ5 Total September Deliveries 40,795 CONTRACT DATE YEAR MONTH COUPON MATURITY CONTRACTS FACTOR CUSIP CBOT 5-Year T-Notes 4-Oct 2017 October 1.750% 11/30/ , U65 Total September Deliveries 10,657 CONTRACT DATE YEAR MONTH COUPON MATURITY CONTRACTS FACTOR CUSIP CBOT 2-Year T-Notes 4-Oct 2017 October 1.625% 6/30/2019 6, WS5 The Registrar Report contains the official delivery information, by contract. For each US Treasury contract the Reports shows dates of delivery, security delivered, contract amount, conversion factor, and CUSIP number. Total September Deliveries 6,936 The information in this report is taken from sources believed to be reliable; however, the Chicago Board of Trade disclaims all liability whatsoever with regard to its accuracy or completeness. This report is produced for informational purposes only. Prepared by the Registrar's Office Chicago Board of Trade (312) CME Group. All rights reserved. 45

46 Cheapest-to-deliver (CTD) US Treasury Futures tend to trade like their CTD issue. The exchange does not establish which issue is CTD CME Group. All rights reserved. 46

47 Cheapest-to-deliver (CTD) UST OTR versus Futures CTD Yield Curve 3.500% 3.000% ZBZ7 UBZ % TNZ % 1.500% 1.000% ZNZ7 ZTZ7 ZFZ7 OTR Futures 0.500% 0.000% 2018 CME Group. All rights reserved. 47

48 Futures contract price Delivery mechanism explains contract price Assume: TYM7 (classic Ten-Year contract) CTD = 2-1/4% 2/15/2024, net basis near zero, its CF = CTD price = (decimal) Cost-of-carry until LDD ~ $ per $100,000 (positive carry) = x $1,000 (TY contract factor) = $126, $126, $ (cost-of-carry) = $125, $125, $1,000 (contract factor) = = (1/32s) Data source: Bloomberg 2018 CME Group. All rights reserved. 48

49 Measuring Risk Basis point value (BPV) Change in monetary value for 1 basis point (0.01%) change in yield Often quoted in $ s per $1 million face value of security Also known as dollar value of 01 (DV01), or value of a basis point (VBP) Face Value Days $500,000 $1 MM $10 MM $100 MM 1 $0.14 $0.28 $2.78 $ $0.97 $1.94 $19.44 $ $4.17 $8.33 $83.33 $ $8.33 $16.67 $ $1, $12.50 $25.00 $ $2, $25.00 $50.00 $ $5, $37.50 $75.00 $ $7, $50.00 $ $1, $10, CME Group. All rights reserved. 49

50 Measuring Risk Duration Macauley s duration = average weighted maturity of cash flows (coupons, principle) discounted to Present Value (PV) On-the-Run Treasuries (12/15/2017) Coupon Maturity Duration BPV / mm 2-Yr Note 1.750% 11/30/ $191 5-Yr Note 2.000% 11/30/ $465 Modified duration = % price change per 1% yield change 7-Year Note 2.125% 11/30/ $ Yr Note 2.250% 11/15/ $ Yr Bond 2.750% 11/15/ $2,055 Source: Bloomberg 2018 CME Group. All rights reserved. 50

51 Measuring Risk Margins Performance bond, or margins, are determined by the risk and volatility in that products underlying market. Contract Maintenance Margin ZT $420 ZF $700 ZN $1,150 Moving out the futures yield curve assumes greater price risk. Therefore margins are greater on longer maturity contracts. TN $1,700 UB $3,150 ZB $3,900 Source: CMEGroup.com as of 7/5/2017 Margins subject to change without notice CME Group. All rights reserved. 51

52 Measuring Risk One way to measure a security s or portfolio s risk is basis point value (BPV) Contract UST 5-Year Note DEC Date 11/7/2017 $100,000 Notional Repo Rate 1.17% # Days 58 Coupon Maturity Price/32s YTM BPV/100K CF Basis/32s Carry Net Basis Mod Dur /28/ /31/ /30/ /31/ /30/ /31/ /31/ /30/ /31/ Futures contracts can also be measured by their theoretical BPV. Data Source: Bloomberg and CME Group 2018 CME Group. All rights reserved. 52

53 Measuring Risk BPV contract = BPV ctd CF ctd Contract UST 5-Year Note DEC Date 11/7/2017 $100,000 Notional Repo Rate 1.17 # Days 58 Coupon Maturity Price/32s YTM BPV/100K CF BPV/CF Basis/32s Carry Net Basis /28/ /31/ /30/ /31/ /30/ /31/ /31/ /30/ /31/ Adjusting the eligible securities by their respective CFs is how the contract sees the delivery curve. Data Source: Bloomberg and CME Group 2018 CME Group. All rights reserved. 53

54 Measuring Risk BPV contract = BPV ctd CF ctd Contract UST 5-Year Note DEC Date 11/7/2017 $100,000 Notional Repo Rate 1.17 # Days 58 Coupon Maturity Price/32s YTM BPV/100K CF BPV/CF Basis/32s Carry Net Basis /28/ /31/ /30/ /31/ /30/ /31/ /31/ /30/ /31/ Hedge Ratio = BPV risk BPV contract Data Source: Bloomberg and CME Group 2018 CME Group. All rights reserved. 54

55 Hedge Ratio (HR) Example: Long $100 million U.S Treasury portfolio with an average BPV of $450 per million. How many ZFZ7 contracts would I need to sell? Step 1: Identify ZFZ7 s CTD Step 2: Calculate ZFZ7 s CF adjusted BPV Step 3: Calculate HR 2018 CME Group. All rights reserved. 55

56 Hedge Ratio (HR) Step 1: Identify ZFZ7 s CTD. Contract UST 5-Year Note DEC Date 11/7/2017 $100,000 Notional Repo Rate 1.17 # Days 58 Coupon Maturity Price/32s YTM BPV/100K CF BPV/CF Basis/32s Carry Net Basis /28/ /31/ /30/ /31/ /30/ /31/ /31/ /30/ /31/ Data Source: Bloomberg and CME Group 2018 CME Group. All rights reserved. 56

57 Hedge Ratio (HR) Step 2: Calculate ZFZ7 s CF adjusted BPV Contract UST 5-Year Note DEC Date 11/7/2017 $100,000 Notional Repo Rate 1.17 # Days 58 Coupon Maturity Price/32s YTM BPV/100K CF BPV/CF Basis/32s Carry Net Basis /28/ /31/ /30/ /31/ /30/ /31/ /31/ /30/ /31/ BPV contract = BPV ctd CF ctd BPV contract = $41.15/ = $48.42 per 100K Data Source: Bloomberg and CME Group 2018 CME Group. All rights reserved. 57

58 Hedge Ratio (HR) Step 3: Calculate HR HR = BPV risk BPV contract BPV risk = 450 x 100 = 45,000 HR = 45,000 / HR = or Sell 929 ZFZ7 to hedge portfolio 2018 CME Group. All rights reserved. 58

59 Questions? 2018 CME Group. All rights reserved.

60 For seasoned traders or those who are just getting started, CME Group is your source to learn about the derivatives and risk management industry. Explore CME Institute where you will find courses on products and trading strategies, seminars, research and commentary. Institute.cmegroup.com 2018 CME Group. All rights reserved. 60

61 Contact us: David Gibbs, Director, Market Development cmegroup.com 2018 CME Group. All rights reserved. 61

62 Thank you 2018 CME Group. All rights reserved.

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U.S. Treasury Futures 1.0. Agenda. June Foundational Concepts. 5 Review and Q&A. 4 Measuring risk, BPV, Hedge Ratio (HR)

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