U.S. Treasury Futures PDF Free Download

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 All matters pertaining to rules and specifications herein are made subject to and are superseded by official Exchange rules.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. 2018 CME Group. All rights reserved.

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% 0 2 5 7 10 20 30 2018 CME Group. All rights reserved. 5

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 2018 CME Group. All rights reserved. 7

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

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. 2018 CME Group. All rights reserved. 10

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. 2018 CME Group. All rights reserved. 11

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. 2018 CME Group. All rights reserved. 12

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. 2018 CME Group. All rights reserved. 13

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 25 26 27 1 st Position 1 st Intention Day 28 1 1 st Business Day 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 LTD Tens & Bonds 22 23 24 25 26 27 28 LTD: 2s & 5s LDD: Tens & Bonds 1 2 3 4 5 LDD: 2s & 5s 6 7 8 9 10 2018 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. 2018 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) 2018 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. Contracts 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 TYZ7 TYH8 Roll Position Day 1 st Business Day 100.0 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 % of total OI Over 90% of Classic Ten-Year open positions rolled forward by first business of delivery month. http://www.cmegroup.com/trading/interest-rates/paceoftheroll/ 2018 CME Group. All rights reserved. 17

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 2018 CME Group. All rights reserved. 18

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

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

Deliverable basket ZNH7 (5-Year) contract as of 12/1/2016 Contract UST 5-Year Note DEC 2017 117.0925 11/7/2017 $100,000 Notional 58 days Coupon Maturity Price/32s YTM Mod Dur 1.875 2/28/2022 99.2550 1.924 4.11 1.875 3/31/2022 99.2375 1.936 4.19 1.875 4/30/2022 99.2213 1.947 4.28 1.750 5/31/2022 99.0413 1.950 4.33 1.750 6/30/2022 99.0188 1.963 4.41 1.875 7/31/2022 99.1750 1.976 4.48 1.625 8/31/2022 98.1238 1.978 4.59 1.875 9/30/2022 99.1538 1.987 4.65 2.000 10/31/2022 100.0238 1.984 4.72 9 securities eligible for delivery with a combined outstanding face value of approximately $372 billion. Data Source: Bloomberg 2018 CME Group. All rights reserved. 21

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. 2018 CME Group. All rights reserved. 23

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. 2018 CME Group. All rights reserved. 24

Treasury Basis Basis = Cash Price (Futures Price x CF) P futures 117.0925 Coupon Maturity Price/32s Pdecimal CF Pf x CF Basis = Pc - (Pf x CF) Basis/32s 2.000% 10/31/2022 100.0238 100.0742 0.8343 97.8543 2.2200 71.04 Step 1: Convert prices from 1/32s to decimal P futures = 117.0925 (1/32s) = 117.0029 CF = 0.8343, P f x CF = 97.8543 P cash = 100.0238 (1/32s) = 100.0742 Step 2: Do the math in decimal Basis = 100.0742 97.8543 = 2.2200 Step 3: Convert back to 1/32s 2.2200 = 71.04 ticks (1/32s) 2018 CME Group. All rights reserved. 25

Treasury Basis Basis = Cash Price (Futures Price x CF) Contract UST 5-Year Note DEC 2017 117.0925 11/7/2017 $100,000 Notional 58 days Coupon Maturity Price/32s P/decimal CF Pf x CF Basis/decimal Basis/32s 1.875 2/28/2022 99.2550 99.7969 0.8499 99.6840 0.1129 3.61 1.875 3/31/2022 99.2375 99.7422 0.8472 99.3673 0.3749 12.00 1.875 4/30/2022 99.2213 99.6914 0.8446 99.0624 0.6290 20.13 1.750 5/31/2022 99.0413 99.1289 0.8372 98.1944 0.9345 29.90 1.750 6/30/2022 99.0188 99.0586 0.8345 97.8778 1.1808 37.79 1.875 7/31/2022 99.1750 99.5469 0.8368 98.1475 1.3994 44.78 1.625 8/31/2022 98.1238 98.3867 0.8242 96.6697 1.7170 54.95 1.875 9/30/2022 99.1538 99.4805 0.8316 97.5376 1.9429 62.17 2.000 10/31/2022 100.0238 100.0742 0.8343 97.8543 2.2199 71.04 Data Source: Bloomberg and CME Group 2018 CME Group. All rights reserved. 26

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

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. 2018 CME Group. All rights reserved. 28

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 40 20 Negative Carry 0 Repo rates < coupon rate generally results in positive carry -20-40 Positive Carry -60 t+0 t+1 t+2 t+3 t+4 t+5 t+6 t+7 2018 CME Group. All rights reserved. 29

Treasury Basis ZNZ7 (Ten-Year) Treasury futures (8 December 2017) Month Open High Low Settlement Volume Open Interest DEC 17 124-180 124-225 124-130 124-165 16,952 91,968 MAR 18 124-110 124-155 124-050 124-085 1,119,689 3,212,410 JUN 18 - - - 124-000 0 0 TOTAL 1,136,641 3,304,378 Notice the tighter calendar rolls due to higher S-T interest rates. 2018 CME Group. All rights reserved. 30

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 2015 2018 CME Group. All rights reserved. 31

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). 2018 CME Group. All rights reserved. 34

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). 2018 CME Group. All rights reserved. 35

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 100.0238 (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) = $320.44 FC = (Price + Accrued Interest) x (RP / 100) x (days until delivery / 360) = ($100,074.22 + $359.12) x (1.17 / 100) x (58/360) = $189.32 2018 CME Group. All rights reserved. 36

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) = $320.44 FC = (Price + Accrued Interest) x (RP / 100) x (days until delivery / 360) = ($100,074.22 + $359.12) x (1.17 / 100) x (58/360) = $189.32 Carry = $320.44 189.32 = $131.12 = $131.12 / 31.25 (tick value per $100,000) = 4.10 ticks Positive Carry 2018 CME Group. All rights reserved. 37

Treasury Basis Carry = Coupon Income Financing Cost Contract UST 5-Year Note DEC 2017 117.0925 11/7/2017 $100,000 Notional 58 days Coupon Maturity Price/32s CF Basis/32s Carry 1.875 2/28/2022 99.2550 0.8499 3.61 3.5723 1.875 3/31/2022 99.2375 0.8472 12.00 3.5322 1.875 4/30/2022 99.2213 0.8446 20.13 3.5977 1.750 5/31/2022 99.0413 0.8372 29.90 2.9073 1.750 6/30/2022 99.0188 0.8345 37.79 2.8266 1.875 7/31/2022 99.1750 0.8368 44.78 3.4214 1.625 8/31/2022 98.1238 0.8242 54.95 2.3784 1.875 9/30/2022 99.1538 0.8316 62.17 3.5480 2.000 10/31/2022 100.0238 0.8343 71.04 4.2153 Data Source: Bloomberg and CME Group 2018 CME Group. All rights reserved. 38

Treasury Basis Net Basis = Basis - Carry Contract UST 5-Year Note DEC 2017 117.0925 11/7/2017 $100,000 Notional 58 days Coupon Maturity Price/32s CF Basis/32s Carry Net Basis 1.875 2/28/2022 99.2550 0.8499 3.61 3.57 0.04 1.875 3/31/2022 99.2375 0.8472 12.00 3.53 8.46 1.875 4/30/2022 99.2213 0.8446 20.13 3.60 16.53 1.750 5/31/2022 99.0413 0.8372 29.90 2.91 27.00 1.750 6/30/2022 99.0188 0.8345 37.79 2.83 34.96 1.875 7/31/2022 99.1750 0.8368 44.78 3.42 41.36 1.625 8/31/2022 98.1238 0.8242 54.95 2.38 52.57 1.875 9/30/2022 99.1538 0.8316 62.17 3.55 58.62 2.000 10/31/2022 100.0238 0.8343 71.04 4.22 66.82 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

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. 2018 CME Group. All rights reserved. 40

Treasury Basis Implied Repo Rate (IRR) The security with highest implied repo rate (IRR) is considered CTD. Contract UST 5-Year Note DEC 2017 117.0925 11/7/2017 $100,000 Notional 58 days Coupon Maturity Price/32s CF Basis/32s Carry Net Basis IRR 1.875 2/28/2022 99.2550 0.8499 3.61 3.57 0.04 1.16 1.875 3/31/2022 99.2375 0.8472 12.00 3.53 8.46-0.47 1.875 4/30/2022 99.2213 0.8446 20.13 3.60 16.53-2.05 1.750 5/31/2022 99.0413 0.8372 29.90 2.91 27.00-4.11 1.750 6/30/2022 99.0188 0.8345 37.79 2.83 34.96-5.64 1.875 7/31/2022 99.1750 0.8368 44.78 3.42 41.36-6.85 1.625 8/31/2022 98.1238 0.8242 54.95 2.38 52.57-9.16 1.875 9/30/2022 99.1538 0.8316 62.17 3.55 58.62-10.24 2.000 10/31/2022 100.0238 0.8343 71.04 4.22 66.82-11.78 2018 CME Group. All rights reserved. 41

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. 2018 CME Group. All rights reserved. 43

Cheapest-to-deliver (CTD) However Ultra-Bond in September 2017: Date Contracts 18 Sept 936 19 Sept 100 20 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

Registrar Reports CUSIPS Delivered for Financial Contracts http://www.cmegroup.com/clearing/operations-and-deliveries/registrar-reports.html 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% 11/15/2043 936 0.7056 912810RD2 CBOT Ultra T-Bonds 19-Sep 2017 September 3.75% 11/15/2043 100 0.7056 912810RD2 CBOT Ultra T-Bonds 20-Sep 2017 September 3.75% 11/15/2043 1 0.7056 912810RD2 CBOT Ultra T-Bonds 29-Sep 2017 September 3.75% 11/15/2043 1,604 0.7056 912810RD2 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 3,456 0.8349 912810FT0 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% 2/15/2027 103 0.7367 912828V98 CBOT Ultra 10-Year T-Notes 29-Sep 2017 September 2.25% 2/15/2027 527 0.7367 912828V98 Total September Deliveries 630 CONTRACT DATE YEAR MONTH COUPON MATURITY CONTRACTS FACTOR CUSIP CBOT 10-Year T-Notes 29-Sep 2017 September 2.50% 5/15/2014 40,795 0.8139 912828WJ5 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% 11/30/2021 10,657 0.8453 912828U65 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 6,936 0.9283 912828WS5 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) 435-3644 2018 CME Group. All rights reserved. 45

Cheapest-to-deliver (CTD) UST OTR versus Futures CTD Yield Curve 3.500% 3.000% ZBZ7 UBZ7 2.500% TNZ7 2.000% 1.500% 1.000% ZNZ7 ZTZ7 ZFZ7 OTR Futures 0.500% 0.000% 2018 CME Group. All rights reserved. 47

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 = 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 2018 CME Group. All rights reserved. 48

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 2018 CME Group. All rights reserved. 49

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% 11/30/2019 1.907 $191 5-Yr Note 2.000% 11/30/2022 4.682 $465 Modified duration = % price change per 1% yield change 7-Year Note 2.125% 11/30/2024 6.415 $635 10-Yr Note 2.250% 11/15/2027 8.808 $873 30-Yr Bond 2.750% 11/15/2047 20.304 $2,055 Source: Bloomberg 2018 CME Group. All rights reserved. 50

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. 2018 CME Group. All rights reserved. 51

Measuring Risk One way to measure a security s or portfolio s risk is basis point value (BPV) Contract UST 5-Year Note DEC 2017 117.0925 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 1.875 2/28/2022 99.2550 1.924 41.15 0.8499 3.61 3.57 0.04 4.11 1.875 3/31/2022 99.2375 1.936 41.89 0.8472 12.00 3.53 8.46 4.19 1.875 4/30/2022 99.2213 1.947 42.63 0.8446 20.13 3.60 16.53 4.28 1.750 5/31/2022 99.0413 1.950 43.24 0.8372 29.90 2.91 27.00 4.33 1.750 6/30/2022 99.0188 1.963 43.97 0.8345 37.79 2.83 34.96 4.41 1.875 7/31/2022 99.1750 1.976 44.85 0.8368 44.78 3.42 41.36 4.48 1.625 8/31/2022 98.1238 1.978 45.27 0.8242 54.95 2.38 52.57 4.59 1.875 9/30/2022 99.1538 1.987 46.30 0.8316 62.17 3.55 58.62 4.65 2.000 10/31/2022 100.0238 1.984 47.22 0.8343 71.04 4.22 66.82 4.72 Futures contracts can also be measured by their theoretical BPV. Data Source: Bloomberg and CME Group 2018 CME Group. All rights reserved. 52

Measuring Risk BPV contract = BPV ctd CF ctd Contract UST 5-Year Note DEC 2017 117.0925 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 1.875 2/28/2022 99.2550 1.924 41.15 0.8499 48.42 3.61 3.57 0.04 1.875 3/31/2022 99.2375 1.936 41.89 0.8472 49.44 12.00 3.53 8.46 1.875 4/30/2022 99.2213 1.947 42.63 0.8446 50.48 20.13 3.60 16.53 1.750 5/31/2022 99.0413 1.950 43.24 0.8372 51.65 29.90 2.91 27.00 1.750 6/30/2022 99.0188 1.963 43.97 0.8345 52.69 37.79 2.83 34.96 1.875 7/31/2022 99.1750 1.976 44.85 0.8368 53.59 44.78 3.42 41.36 1.625 8/31/2022 98.1238 1.978 45.27 0.8242 54.93 54.95 2.38 52.57 1.875 9/30/2022 99.1538 1.987 46.30 0.8316 55.67 62.17 3.55 58.62 2.000 10/31/2022 100.0238 1.984 47.22 0.8343 56.60 71.04 4.22 66.82 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

Measuring Risk BPV contract = BPV ctd CF ctd Contract UST 5-Year Note DEC 2017 117.0925 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 1.875 2/28/2022 99.2550 1.924 41.15 0.8499 48.42 3.61 3.57 0.04 1.875 3/31/2022 99.2375 1.936 41.89 0.8472 49.44 12.00 3.53 8.46 1.875 4/30/2022 99.2213 1.947 42.63 0.8446 50.48 20.13 3.60 16.53 1.750 5/31/2022 99.0413 1.950 43.24 0.8372 51.65 29.90 2.91 27.00 1.750 6/30/2022 99.0188 1.963 43.97 0.8345 52.69 37.79 2.83 34.96 1.875 7/31/2022 99.1750 1.976 44.85 0.8368 53.59 44.78 3.42 41.36 1.625 8/31/2022 98.1238 1.978 45.27 0.8242 54.93 54.95 2.38 52.57 1.875 9/30/2022 99.1538 1.987 46.30 0.8316 55.67 62.17 3.55 58.62 2.000 10/31/2022 100.0238 1.984 47.22 0.8343 56.60 71.04 4.22 66.82 Hedge Ratio = BPV risk BPV contract Data Source: Bloomberg and CME Group 2018 CME Group. All rights reserved. 54

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

Hedge Ratio (HR) Step 1: Identify ZFZ7 s CTD. Contract UST 5-Year Note DEC 2017 117.0925 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 1.875 2/28/2022 99.2550 1.924 41.15 0.8499 48.42 3.61 3.57 0.04 1.875 3/31/2022 99.2375 1.936 41.89 0.8472 49.44 12.00 3.53 8.46 1.875 4/30/2022 99.2213 1.947 42.63 0.8446 50.48 20.13 3.60 16.53 1.750 5/31/2022 99.0413 1.950 43.24 0.8372 51.65 29.90 2.91 27.00 1.750 6/30/2022 99.0188 1.963 43.97 0.8345 52.69 37.79 2.83 34.96 1.875 7/31/2022 99.1750 1.976 44.85 0.8368 53.59 44.78 3.42 41.36 1.625 8/31/2022 98.1238 1.978 45.27 0.8242 54.93 54.95 2.38 52.57 1.875 9/30/2022 99.1538 1.987 46.30 0.8316 55.67 62.17 3.55 58.62 2.000 10/31/2022 100.0238 1.984 47.22 0.8343 56.60 71.04 4.22 66.82 Data Source: Bloomberg and CME Group 2018 CME Group. All rights reserved. 56

Hedge Ratio (HR) Step 2: Calculate ZFZ7 s CF adjusted BPV Contract UST 5-Year Note DEC 2017 117.0925 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 1.875 2/28/2022 99.2550 1.924 41.15 0.8499 48.42 3.61 3.57 0.04 1.875 3/31/2022 99.2375 1.936 41.89 0.8472 49.44 12.00 3.53 8.46 1.875 4/30/2022 99.2213 1.947 42.63 0.8446 50.48 20.13 3.60 16.53 1.750 5/31/2022 99.0413 1.950 43.24 0.8372 51.65 29.90 2.91 27.00 1.750 6/30/2022 99.0188 1.963 43.97 0.8345 52.69 37.79 2.83 34.96 1.875 7/31/2022 99.1750 1.976 44.85 0.8368 53.59 44.78 3.42 41.36 1.625 8/31/2022 98.1238 1.978 45.27 0.8242 54.93 54.95 2.38 52.57 1.875 9/30/2022 99.1538 1.987 46.30 0.8316 55.67 62.17 3.55 58.62 2.000 10/31/2022 100.0238 1.984 47.22 0.8343 56.60 71.04 4.22 66.82 BPV contract = BPV ctd CF ctd BPV contract = $41.15/ 0.8499 = $48.42 per 100K Data Source: Bloomberg and CME Group 2018 CME Group. All rights reserved. 57

Hedge Ratio (HR) Step 3: Calculate HR HR = BPV risk BPV contract BPV risk = 450 x 100 = 45,000 HR = 45,000 / 48.42 HR = 929.37 or Sell 929 ZFZ7 to hedge portfolio 2018 CME Group. All rights reserved. 58

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U.S. Treasury Futures 1.0