Pricing futures contract

CFA Level II Derivatives
#1

Hi all,

With the following data (Question 1 in practice problem of Curriculum), i wonder why they dont include Accrued interest at futures contract expiration in pricing formulas

Exhibit 1. Current Data for Futures and Underlying Bond

Futures Contract:

Quoted futures price: 125.00

Conversion factor: 0.90

Time remaining to contract expiration: Three months

Accrued interest over life of futures contract: 0.00

Underlying Bond

Quoted bond price 112.00

Accrued interest since last coupon payment: 0.08

Accrued interest at futures contract expiration: 0.20

Detail answer from curriculum:

The no-arbitrage futures price is equal to the following:

F0(T) = FV0,T(T)[B0(T + Y) + AI0 – PVCI0,T]

F0(T) = (1 + 0.003)0.25(112.00 + 0.08 – 0)

F0(T) = (1 + 0.003)0.25(112.08) = 112.1640

#2

Bond prices are always – _ always! _ – quoted as clean prices, whether they be spot prices or forward prices. Note the quote on the underlying bond: 112.00 is the clean price.

#3

Thanks

but i wonder why they DO NOT include accured interest at the time of expiration (0.2) when pricing?

#4

Because that’s not part of the price of the bond. Whe the forward expires you’ll have to pay the accrued interest, but that’s over and above the price of the bond.

1 Like
#5

Smagician u r Tiger… Simplified the complicated side… Thanks a lot

#6

In the answer, why in the adjusted price of the futures contract are we added accrued interest of 0.20 in three months to the adjusted price of the futures contract (per below?)

The adjusted price of the futures contract is equal to the conversion factor multiplied by the quoted futures price:

F0(T) = CF(T)QF0(T)

F0(T) = (0.90)(125) = 112.50

Adding the accrued interest of 0.20 in three months (futures contract expiration) to the adjusted price of the futures contract gives a total price of 112.70.

#7

Just not understanding the logic behind the answer in its entirety. If someone could please help explain, that would be greatly appreciated!