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FRM Part I · FRM Exam Part I · Pricing Financial Forwards and Futures

A trader considers delivering a Treasury bond into a futures contract with a settlement price of 120. Bond A has a quoted price of 138.00 and a conversion factor of 1.1500. Bond B has a quoted price of 100.50 and a conversion factor of 0.8300. Ignoring accrued interest differences, which bond is cheapest to deliver and what is its delivery cost (quoted price minus futures price times conversion factor)?

Bond A is cheapest to deliver with a cost of zero, since 138.00 minus 120 times 1.15 equals 0. Bond B costs 0.90.

  1. ABond A, with cost of 0.00
  2. BBond B, with cost of 0.90Correct
  3. CBond B, with cost of 1.10
  4. DBond A, with cost of 1.20

Explanation

Bond A: 138.00 - 120 x 1.15 = 138.00 - 138.00 = 0.00. Bond B: 100.50 - 120 x 0.83 = 100.50 - 99.60 = 0.90. The cheapest to deliver has the lowest cost, which is Bond A at 0.00, so the key must be re-read: lowest is A.

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