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

The most recent settlement price of a Treasury bond futures contract is 120. Two deliverable bonds exist. Bond A has quoted price 138.00 and conversion factor 1.1500. Bond B has quoted price 150.60 and conversion factor 1.2500. Which is cheapest to deliver, and what is its delivery cost per 100 face value?

Bond A is cheapest to deliver with a cost of zero. Its conversion-adjusted futures receipt is 120 times 1.15, or 138, equal to its quoted price of 138. Bond B costs 0.60 (150.60 minus 150), so it is more expensive to deliver.

  1. ABond B, with cost 0.60
  2. BBond B, with cost 30.60
  3. CBond A, with cost 0.00Correct
  4. DBond A, with cost 18.00

Explanation

Cost = quoted price - (futures price x conversion factor). Bond A: 138.00 - 120x1.15 = 138 - 138 = 0.00. Bond B: 150.60 - 120x1.25 = 150.60 - 150 = 0.60. A has the lower cost, so it is cheapest to deliver. Cost of 18.00 ignores the conversion factor by using 138-120.

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