U.S. Treasury Futures 1.0 Foundational Concepts June 2017 2017 CME Group. All rights reserved. Agenda 1 Delivery Process 2 Treasury Basis 3 Cheapest-to-deliver (CTD) 4 Measuring risk, BPV, Hedge Ratio (HR) 5 Review and Q&A 2017 CME Group. All rights reserved.
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 2017 CME Group. All rights reserved. 2017 CME Group. All rights reserved. CME Group Interest Rate Products 3.50% 3.00% Eurodollars 0-10 Years Ultra Long Bond Classic 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% 5-Year T-note 7-Year MAC 1.00% 0.50% 2-Year T-note 2-Year MAC 5-Year MAC CME Group Interest Rate futures include Fed Funds, Eurodollars, US Treasury, and Swap based products. 30-Day Fed Funds 0-3 Years 0.00% 0 2 5 7 10 20 30 2017 CME Group. All rights reserved. 4
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 2011 2017 CME Group. All rights reserved. 5 The Delivery Process Timeline First Position Day Last Trading Day Intention Day Notice Day Delivery Day Time 2017 CME Group. All rights reserved. 6
First Position Day 2 business days prior to the 1 st business day of the delivery month. For example, for June 2017 contracts, May 30, 2017 is First Position Day. Clearing firms obligated to report all open positions in USTs to the CME Clearing House. 2017 CME Group. All rights reserved. 7 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 can receive notice any day in the delivery month. 2017 CME Group. All rights reserved. 8
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. 2017 CME Group. All rights reserved. 9 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. 2017 CME Group. All rights reserved. 10
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. 2017 CME Group. All rights reserved. 11 Delivery Calendar March 2017 U.S. Treasury Futures Contract Schedule LTD = last trading day LDD = last delivery day February / March / April 2017 Sunday Monday Tuesday Wednesday Thursday Friday Saturday 26 27 1 st Position Day 28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 LTD: Tens-Bonds 23 24 25 26 27 28 29 30 31 LTD: Twos-Fives LDD: Tens-Bonds 2 3 4 5 6 7 8 LDD: Twos-Fives 1 2017 CME Group. All rights reserved.
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. 2017 CME Group. All rights reserved. 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) 2017 CME Group. All rights reserved. 14
Why is knowing this so important? Because the concepts that go into the delivery drive the pricing and trading behavior of the futures contract. TYH7 Open Interest as a percent of total OI 2,500,000 3,500,000 3,000,000 70.0 100.0 90.0 80.0 2,000,000 60.0 Contracts 1,500,000 1,000,000 500,000 Position Day 1 st Business Day 50.0 40.0 30.0 20.0 10.0 % of total OI 0 0.0 Over 90% of Classic Ten-Year open positions rolled forward by first business of delivery month. http://www.cmegroup.com/trading/interest-rates/paceoftheroll/ 2017 CME Group. All rights reserved. 15 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 118-20 118-20/32 nds 118.625% of par 118-20 118-202 118-20/32 nds + ¼ of 1/32 118.6328125% of par 118-202 118-20+ 118-20/32 nds + ½ of 1/32 118.640625% of par 118-205 118-206 118-20/32 nds + ¾ of 1/32 118.6484375% of par 118-207 2017 CME Group. All rights reserved. 16
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) 2017 CME Group. All rights reserved. 17 Treasury Futures Analytical Tools available on CMEGroup.com http://www.cmegroup.com/tools-information/quikstrike/treasury-analytics.html 2017 CME Group. All rights reserved. 18
Deliverable baskets vs. March 2017 contracts as of 3/6/2017 Contract # of Eligible Issues Face Value of Deliverable Supplies 2-Year Note 11 $325 Billion 5-Year Note 10 $373 Billion 10-Year Note 20 $1,060 Billion Ultra 10-Year 3 $159 Billion Classic Bond 18 $647 Billion Ultra Bond 20 $806 Billion Source: U.S. Treasury Department 2017 CME Group. All rights reserved. 19 Deliverable basket ZNH7 (5-Year) contract as of 12/1/2016 UST 5-Year Note (ZFH7) MAR 2017 117.185 12/2/2016 $100,000 Notional 124 days Coupon Maturity Price/32s YTM Mod Dur 1.375 5/31/2021 97.3125 1.846 4.33 1.125 6/30/2021 96.2275 1.878 4.41 1.125 7/31/2021 96.1875 1.893 4.49 1.125 8/31/2021 96.1725 1.891 4.57 1.125 9/30/2021 96.1225 1.913 4.66 1.250 10/31/2021 96.2825 1.918 4.73 1.750 11/30/2021 99.1050 1.892 4.76 7 securities eligible for delivery with a combined outstanding face value of approximately $316 billion. Data Source: Bloomberg 2017 CME Group. All rights reserved. 20
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. 2017 CME Group. All rights reserved. 21 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. 2017 CME Group. All rights reserved. 22
Treasury Basis Basis = Cash Price (Futures Price x CF) Pfutures 117-185 Coupon Maturity Price/32s Pdecimal CF Pf x CF Basis = Pc - (Pf x CF) Basis/32s 1.750% 11/30/2021 99.1050 99.328125 0.8292 97.49578 1.83234375 58.64 Step 1: Convert prices from 1/32s to decimal Pfutures = 117-185 (1/32s) = 117.578125 CF = 0.8292, Pf x CF = 97.49578125 Pcash = 99.1050 (1/32s) = 99.328125 Step 2: Do the math in decimal Basis = 99.328125 97.49578125 = 1.83234375 Step 3: Convert back to 1/32s 1.83234375 = 58.64 ticks (1/32s) 2017 CME Group. All rights reserved. 23 Treasury Basis Basis = Cash Price (Futures Price x CF) UST 5-Year Note (ZFH7) MAR 2017 117.185 12/2/2016 $100,000 Notional 124 days Coupon Maturity Price/32s P/decimal CF Pf X CF Basis/decimal Basis/32s 1.375 5/31/2021 97.3125 97.9766 0.8317 97.7897 0.1869 5.98 1.125 6/30/2021 96.2275 96.7109 0.8195 96.3553 0.3556 11.38 1.125 7/31/2021 96.1875 96.5859 0.8164 95.9908 0.5951 19.05 1.125 8/31/2021 96.1725 96.5391 0.8133 95.6263 0.9128 29.21 1.125 9/30/2021 96.1225 96.3828 0.8102 95.2618 1.1210 35.87 1.250 10/31/2021 96.2825 96.8828 0.8121 95.4852 1.3976 44.72 1.750 11/30/2021 99.1050 99.3281 0.8292 97.4958 1.8323 58.64 Data Source: Bloomberg and CME Group 2017 CME Group. All rights reserved. 24
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 2017 CME Group. All rights reserved. 25 Treasury Basis ZNH7 (Ten-Year) Treasury futures (22 March 2017) Month Open High Low Settlement Volume Open Interest MAR 17 124-315 125-090 124-310 125-025 846 20,670 JUN 17 124-130 124-230 124-110 124-170 1,639,082 3,048,684 SEP 17 123-290 124-040 123-275A 124-000 36 320 TOTAL 1,639,964 3,069,674 Treasury futures prices discount over time due to positive carry. 2017 CME Group. All rights reserved. 26
Treasury Basis Carry is defined as: Carry = Coupon Income (CI) Financing Cost (FC) Positive and Negative Carry Repo rates > coupon rate generally results in negative carry Negative Carry Repo rates < coupon rate generally results in positive carry Positive Carry t+0 t+1 t+2 t+3 t+4 t+5 t+6 t+7 2017 CME Group. All rights reserved. 27 Cost of Carry Carry is defined as: Carry = Coupon Income (CI) Financing Cost (FC) Let s take an example: 1.750% of 11/30/2021 priced at 99-1050 (1/32s) Settlement date = 12/2/2016 Next coupon payment date = May 31, 2017 Last coupon payment date = November 30, 2016 (issued) Last delivery date ZNH7 futures = April 5, 2017 Repo Rate = 0.60%, days until delivery = 124 CI = $1,000 x (Coupon rate/2) x (days until delivery/days in coupon cycle) = $1000 x (1.75 / 2) x (124/181) = $599.45 FC = (Price + Accrued Interest) x (RP / 100) x (days until delivery / 360) = ($99,328.12 + $608.58) x (0.60 / 100) x (124/360) = $206.54 2017 CME Group. All rights reserved. 28 60 40 20 0-20 -40-60
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 ($1.75 / 2) x (124/181) = $599.45 FC = (Price + Accrued Interest) x (RP / 100) x (days until delivery / 360) = ($99,328.12 + $608.58) x (0.60 / 100) x (124/360) = $206.54 Carry = $599.45 206.54 = $392.91 = $392.91 / 31.25 (tick value per $100,000) = 12.57 ticks Positive Carry 2017 CME Group. All rights reserved. 29 Treasury Basis Carry = Coupon Income Financing Cost UST 5-Year Note (ZFH7) MAR 2017 117.185 12/2/2016 $100,000 Notional repo rate0.60% 124 days Coupon Maturity Price/32s CF Basis/32s Carry 1.375 5/31/2021 97.3125 0.8317 5.98 8.51 1.125 6/30/2021 96.2275 0.8195 11.38 5.88 1.125 7/31/2021 96.1875 0.8164 19.05 5.84 1.125 8/31/2021 96.1725 0.8133 29.21 5.88 1.125 9/30/2021 96.1225 0.8102 35.87 5.88 1.250 10/31/2021 96.2825 0.8121 44.72 7.29 1.750 11/30/2021 99.1050 0.8292 58.64 12.51 Data Source: Bloomberg and CME Group 2017 CME Group. All rights reserved. 30
Treasury Basis Net Basis = Basis - Carry UST 5-Year Note (ZFH7) MAR 2017 117.185 12/2/2016 $100,000 Notional 124 days Coupon Maturity Price/32s CF Basis/32s Carry Net Basis 1.375 5/31/2021 97.3125 0.8317 5.98 8.51-2.53 1.125 6/30/2021 96.2275 0.8195 11.38 5.88 5.50 1.125 7/31/2021 96.1875 0.8164 19.05 5.84 13.21 1.125 8/31/2021 96.1725 0.8133 29.21 5.88 23.33 1.125 9/30/2021 96.1225 0.8102 35.87 5.88 30.00 1.250 10/31/2021 96.2825 0.8121 44.72 7.29 37.44 1.750 11/30/2021 99.1050 0.8292 58.64 12.51 46.13 The security with the lowest net basis in generally considered the CTD security. Data Source: Bloomberg and CME Group 2017 CME Group. All rights reserved. 31 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. 2017 CME Group. All rights reserved. 32
Treasury Basis Implied Repo Rate (IRR) The security with highest implied repo rate (IRR) is considered CTD. UST 5-Year Note (ZFH7) MAR 2017 117.185 12/2/2016 $100,000 Notional repo rate 0.60% 124 days Coupon Maturity Price/32s YTM CF Basis/32s Net Basis IRR 1.375 5/31/2021 98.0150 1.830 0.8317 8.23-0.28 0.625 1.125 6/30/2021 96.2275 1.878 0.8195 11.38 5.50 0.085 1.125 7/31/2021 96.1875 1.893 0.8164 19.05 13.21-0.640 1.125 8/31/2021 96.1725 1.891 0.8133 29.21 23.33-1.591 1.125 9/30/2021 96.1225 1.913 0.8102 35.87 30.00-2.219 1.250 10/31/2021 96.2825 1.918 0.8121 44.72 37.44-2.902 1.750 11/30/2021 99.1050 1.892 0.8292 58.64 46.13-3.613 2017 CME Group. All rights reserved. 33 Cheapest-to-deliver (CTD) As of March 6, 2017 CTD by contract: ZTH7 = 1.500% 12/31/2018 ZFH7 = 1.375% 5/31/2021 ZNH7 = 2.750% 11/15/2023 TNH7 = 1.500% 8/15/2026 ZBH7 = 5.000% 5/15/2037 UBH7 = 3.375% 1115/2043 In the March 2017 cycle, by Last Delivery Day (LDD) all US Treasury contract short positions delivered the respective CTD security. 2017 CME Group. All rights reserved. 34
Cheapest-to-deliver (CTD) However UBH7 (Ultra-Bond) Date Contracts 22 March 789 23 March 2,632 24 March 26 The short decides when and what to deliver. 2017 CME Group. All rights reserved. 35 Cheapest-to-deliver (CTD) US Treasury Futures tend to trade like their CTD issue. The exchange does not establish which issue is CTD. 2017 CME Group. All rights reserved. 36
Cheapest-to-deliver (CTD) UST OTR versus Futures CTD Yield Curve 3.500% UBH7 3.000% ZBH7 2.500% TNH7 2.000% ZNH7 1.500% 1.000% ZTH7 OTR Futures 0.500% 0.000% 2017 CME Group. All rights reserved. 37 Futures contract price Delivery mechanism explains contract price Assume: TYM7 (classic Ten-Year contract) CTD = 2-2/4% 2/15/2024, net basis near zero, its CF = 0.8272 CTD price = 104.234375 (decimal) Cost-of-carry until LDD ~ $292.00 per $100,000 (positive carry) 104.234375 0.8272 = 126.0086738 126.0086738 x $1,000 (TY contract factor) = $126,008.67 $126,008.67 - $292.00 (cost-of-carry) = $125,716.67 $125,716.67 $1,000 (contract factor) = 125.71667 = 125-230 (1/32s) Data source: Bloomberg 2017 CME Group. All rights reserved. 38
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 $27.78 7 $0.97 $1.94 $19.44 $194.44 30 $4.17 $8.33 $83.33 $833.33 60 $8.33 $16.67 $166.67 $1,666.67 90 $12.50 $25.00 $250.00 $2,500.00 180 $25.00 $50.00 $500.00 $5,000.00 270 $37.50 $75.00 $750.00 $7,500.00 360 $50.00 $100.00 $1,000.00 $10,000.00 2017 CME Group. All rights reserved. 39 Measuring Risk Duration Macauley s duration = average weighted maturity of cash flows (coupons, principle) discounted to Present Value (PV) On-the-Run Treasuries (1/5/2017) Coupon Maturity Duration BPV / mm 2-Yr Note 1.125% 12/31/2018 1.965 $196 5-Yr Note 2.000% 12/31/2021 4.767 $476 Modified duration = % price change per 1% yield change 7-Year Note 2.250% 12/31/2023 6.501 $646 10-Yr Note 2.000% 11/15/2026 8.951 $859 30-Yr Bond 2.875% 11/15/2046 20.061 $1,952 Source: Bloomberg 2017 CME Group. All rights reserved. 40
Measuring Risk Margins Performance bond, or margins, are determined by the risk and volatility in that products underlying market. Contract Maintenance Margin ZT $650 ZF $850 ZN $1,450 Moving out the futures yield curve assumes greater price risk. Therefore margins are greater on longer maturity contracts. TN $2,200 UB $4,400 ZB $5,600 Source: CMEGroup.com as of 1/5/2017 Margins subject to change without notice. 2017 CME Group. All rights reserved. 41 Measuring Risk One way to measure a security s or portfolio s risk is basis point value (BPV) UST 5-Year Note (ZFH7) MAR 2017 117.185 12/2/2016 $100,000 Notional repo rate0.60% 124 days Coupon Maturity Price/32s YTM BPV/100K CF Basis/32s Carry Net Basis Mod Dur 1.375 5/31/2021 97.3125 1.846 42.45 0.8317 5.98 8.51-2.53 4.33 1.125 6/30/2021 96.2275 1.878 42.86 0.8195 11.38 5.88 5.50 4.41 1.125 7/31/2021 96.1875 1.893 43.57 0.8164 19.05 5.84 13.21 4.49 1.125 8/31/2021 96.1725 1.891 44.28 0.8133 29.21 5.88 23.33 4.57 1.125 9/30/2021 96.1225 1.913 44.96 0.8102 35.87 5.88 30.00 4.66 1.250 10/31/2021 96.2825 1.918 45.84 0.8121 44.72 7.29 37.44 4.73 1.750 11/30/2021 99.1050 1.892 47.26 0.8292 58.64 12.51 46.13 4.76 Futures contracts can also be measured by their theoretical BPV. Data Source: Bloomberg and CME Group 2017 CME Group. All rights reserved. 42
Measuring Risk BPVcontract = BPVctd CFctd UST 5-Year Note (ZFH7) MAR 2017 117.185 12/2/201 6 $100,000 Notional repo rate0.60% 124 days Coupon Maturity Price/32s YTM BPV/100K CF BPV/CF Basis/32s Carry Net Basis 1.375 5/31/2021 97.3125 1.846 42.45 0.8317 51.04 5.98 8.51-2.53 1.125 6/30/2021 96.2275 1.878 42.86 0.8195 52.30 11.38 5.88 5.50 1.125 7/31/2021 96.1875 1.893 43.57 0.8164 53.37 19.05 5.84 13.21 1.125 8/31/2021 96.1725 1.891 44.28 0.8133 54.44 29.21 5.88 23.33 1.125 9/30/2021 96.1225 1.913 44.96 0.8102 55.49 35.87 5.88 30.00 1.250 10/31/2021 96.2825 1.918 45.84 0.8121 56.45 44.72 7.29 37.44 1.750 11/30/2021 99.1050 1.892 47.26 0.8292 57.00 58.64 12.51 46.13 Adjusting the eligible securities by their respective CFs is how the contract sees the delivery curve. Data Source: Bloomberg and CME Group 2017 CME Group. All rights reserved. 43 Measuring Risk BPVcontract = BPVctd CFctd UST 5-Year Note (ZFH7) MAR 2017 117.185 12/2/201 6 $100,000 Notional repo rate0.60% 124 days Coupon Maturity Price/32s YTM BPV/100K CF BPV/CF Basis/32s Carry Net Basis 1.375 5/31/2021 97.3125 1.846 42.45 0.8317 51.04 5.98 8.51-2.53 1.125 6/30/2021 96.2275 1.878 42.86 0.8195 52.30 11.38 5.88 5.50 1.125 7/31/2021 96.1875 1.893 43.57 0.8164 53.37 19.05 5.84 13.21 1.125 8/31/2021 96.1725 1.891 44.28 0.8133 54.44 29.21 5.88 23.33 1.125 9/30/2021 96.1225 1.913 44.96 0.8102 55.49 35.87 5.88 30.00 1.250 10/31/2021 96.2825 1.918 45.84 0.8121 56.45 44.72 7.29 37.44 1.750 11/30/2021 99.1050 1.892 47.26 0.8292 57.00 58.64 12.51 46.13 Hedge Ratio = BPVrisk BPVcontract Data Source: Bloomberg and CME Group 2017 CME Group. All rights reserved. 44
Hedge Ratio (HR) Example: Long $100 million U.S Treasury portfolio with an average BPV of $450 per million. How many ZFH7 contracts would I need to sell? Step 1: Identify ZFH7 s CTD Step 2: Calculate ZFH7 s CF adjusted BPV Step 3: Calculate HR 2017 CME Group. All rights reserved. 45 Hedge Ratio (HR) Step 1: Identify ZFH7 s CTD. UST 5-Year Note (ZFH7) MAR 2017 117.185 12/2/201 6 $100,000 Notional repo rate0.60% 124 days Coupon Maturity Price/32s YTM BPV/100K CF BPV/CF Basis/32s Carry Net Basis 1.375 5/31/2021 97.3125 1.846 42.45 0.8317 51.04 5.98 8.51-2.53 1.125 6/30/2021 96.2275 1.878 42.86 0.8195 52.30 11.38 5.88 5.50 1.125 7/31/2021 96.1875 1.893 43.57 0.8164 53.37 19.05 5.84 13.21 1.125 8/31/2021 96.1725 1.891 44.28 0.8133 54.44 29.21 5.88 23.33 1.125 9/30/2021 96.1225 1.913 44.96 0.8102 55.49 35.87 5.88 30.00 1.250 10/31/2021 96.2825 1.918 45.84 0.8121 56.45 44.72 7.29 37.44 1.750 11/30/2021 99.1050 1.892 47.26 0.8292 57.00 58.64 12.51 46.13 Data Source: Bloomberg and CME Group 2017 CME Group. All rights reserved. 46
Hedge Ratio (HR) Step 2: Calculate ZFH7 s CF adjusted BPV UST 5-Year Note (ZFH7) MAR 2017 117.185 12/2/201 6 $100,000 Notional repo rate 0.60% 124 days Coupon Maturity Price/32s YTM BPV/100K CF BPV/CF Basis/32s Carry Net Basis 1.375 5/31/2021 97.3125 1.846 42.45 0.8317 51.04 5.98 8.51-2.53 1.125 6/30/2021 96.2275 1.878 42.86 0.8195 52.30 11.38 5.88 5.50 1.125 7/31/2021 96.1875 1.893 43.57 0.8164 53.37 19.05 5.84 13.21 1.125 8/31/2021 96.1725 1.891 44.28 0.8133 54.44 29.21 5.88 23.33 1.125 9/30/2021 96.1225 1.913 44.96 0.8102 55.49 35.87 5.88 30.00 1.250 10/31/2021 96.2825 1.918 45.84 0.8121 56.45 44.72 7.29 37.44 1.750 11/30/2021 99.1050 1.892 47.26 0.8292 57.00 58.64 12.51 46.13 BPVcontract = BPVctd CFctd BPVcontract = $42.45 / 0.8317 = $51.04 per 100K Data Source: Bloomberg and CME Group 2017 CME Group. All rights reserved. 47 Hedge Ratio (HR) Step 3: Calculate HR HR = BPVrisk BPVcontract BPVrisk = 450 x 100 = 45,000 HR = 45,000 / 51.04 HR = 881.66 or Sell 882 ZFH7 to hedge portfolio 2017 CME Group. All rights reserved. 48
Questions? 2017 CME Group. All rights reserved. Contact us: David Gibbs, Director, Market Development +1 312 207 2591 David.Gibbs@cmegroup.com cmegroup.com 2017 CME Group. All rights reserved. 50
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