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Download PDF by Muzur A. : A Xonrational Approach to Theories of Conflict and

By Muzur A.

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Let us now look in greater detail at the hedge ratio. There are different methods available to calculate hedge ratios. The most common ones are the conversion factor method, which can be used for deliverable bonds (also known as the price factor method) and the modified duration method (also known as the basis point value method). Where a hedge is put on against a bond that is in the futures delivery basket it is common for the conversion factor to be used to calculate the hedge ratio. A conversion factor hedge ratio is more useful as it is transparent and remains constant, irrespective of any changes in the price of the cash bond or the futures contract.

2 FUTURES PRICING We now introduce the first principles behind the pricing of a futures contract. In practice, cash markets are now priced off derivatives markets, reflecting the greater liquidity of the latter. However, understanding the theory allows for a greater understanding of the nature of the contract itself. 1B Bloomberg page CTM showing current contract price and volume data for US Treasury long bond futures contract, 1 November 2005. P. Used with permission. 1 Theoretical principle Although it may not appear so on first trading, floor trading on a futures exchange is probably the closest one gets to an example of the economist’s perfect and efficient market.

Where a hedge is put on against a bond that is in the futures delivery basket it is common for the conversion factor to be used to calculate the hedge ratio. A conversion factor hedge ratio is more useful as it is transparent and remains constant, irrespective of any changes in the price of the cash bond or the futures contract. 5): Number of contracts ¼ Mbond  CF Mfut ð1:5Þ 24 THE FUTURES BOND BASIS where M is the nominal value of the bond or futures contract. The conversion factor method may only be used for bonds in the delivery basket.

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A Xonrational Approach to Theories of Conflict and Coalitions by Muzur A.


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