11_02_2010 Bond Options

11_02_2010 Bond Options - 1 NAME OF INITIATIVE OR GROUP...

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Unformatted text preview: 1 NAME OF INITIATIVE OR GROUP FIXED INCOME SECURITIES Fall 2010 FNCE 235/725 Prof. Stephan Dieckmann NOVEMBER 2, 2010 BOND OPTIONS 2 Market Data November 1, 2010 3 Market Data November 1, 2010 4 Insuring a 5 year US Treasury Bond As of today, you could sell a 6% coupon bond, per end of March 2011, for 121 + 18.5/32 = 121.578% The implied forward rate of this bond is 1.51% Insuring such a bond to receive at least 121 costs 54 cent Break even point corresponds to a yield to maturity of 1.72% Bond Price Payoff 121 5 Other Strategy Suppose you think interest rates will change, but are unsure about the direction What is the payoff profile if you were to buy call and put at the same strike price? Break even points correspond to 1.41% and 1.83% Bond Price Payoff 121 6 Other Strategy Suppose you think interest rates will stable What is the payoff profile if you were to sell call and put at the same strike price? Bond Price Payoff 121 U.S. Treasury futures and options play an important role in the risk management strategies of global market participants. INTEREST RATE PRODUCTS U.S. Treasury Futures and Options Overview U.S. Treasury futures and options provide a wide variety of market participants around-the-globe with the ability to adjust their interest rate exposure. Futures and options on 2-Year, 5-Year and 10-Year Treasury Notes and 30-Year Treasury Bonds are key tools for those who wish to manage their interest rate risk, as well as those who wish to take advantage of price volatility. Among the most liquid products in the world, U.S. Treasury futures and options lend themselves to a variety of risk management and trading applications, including hedging, income enhancement, duration adjustments, interest rate speculation and spread trades. The average daily volume in Treasury futures and options has been as high as 4.1 million contracts a day 1 , with more than 90 percent of the futures traded electronically. The availability of U.S. Treasury futures and options on CME Globex further enhances the efficiency of trading these products, providing nearly 24-hour access for users around-the-world. 2 4 Q 1 Q 2 Q 3 Q 4 Q 2 Q 3 Q 4 Q 2 Q 3 Q 4 Q 2 Q 3 Q 4 2 5 Q 1 2 6 Q 1 2 7 Q 1 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 3,500,000 4,000,000 U.S. TREASURY FUTURES AND OPTIONS QUARTERLY AVERAGE DAILY VOLUME JAN 2006 JAN 2007 Electronic Open Outcry Benefits U.S. Treasury futures and options play an important role in the risk management strategies of global market participants, including: bankers cash managers governments insurance companies mortgage bankers pension fund managers underwriters bond dealers corporate treasurers hedge fund managers investment bankers mutual fund managers portfolio managers trust fund departments 1 November, 2007 For information on U.S. Treasury futures and options, visit www.cmegroup.com. Contract Size One U.S. Treasury note having a face value at maturity of One U....
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11_02_2010 Bond Options - 1 NAME OF INITIATIVE OR GROUP...

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