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Unit 10: Interest Rate Derivatives and Euro-Dollar Derivatives
10.1.1 T-Bill Futures Notes
A T-bill future is traded on the International Monetary Market (IMM) in Chicago. This market
requires the physical delivery of the underlying T-bill. Physical delivery means that at the
delivery date, the short (seller of the contract) must give the long the T-bill. This is in contrast to
cash settlement, where the short simply pays the long the cash value of the underlying instrument.
Did u know? What are Treasury-Bills?
T-bills are money market instruments to finance the short-term requirements of the
Government of India.
Treasury bill includes 3 month T-bills, 6 month T-bills, and 1 year T-bills. These bills are auctioned
at regular intervals, and the delivery dates of the futures contracts are set so that on a delivery
date, there are three possible underlying bonds: the new 3 month T-bill, the "seasoned" 6 month
T-bill, and the "seasoned" 1 year T-bill. The seasoned 6 month bill is that which was issued three
months ago and has three months left to maturity. The seasoned one year bill was issued nine
months ago and also has three months left. Three months can mean 90, 91, or 92 days, depending
on the month in which the contract was issued.
T-bill Futures prices are quoted relative to an index value. This time, however, they are quoted
at 100 minus an annualized percentage discount rate. The annualized discount rate is expressed
to two decimal places. Even though it looks like a price, what is quoted is not the price. The
actual price is computed from the quotation as follows:
100 QP 90
Price = $1,000,000 – $1,000,000
100 360
Thus the quoted price, QP, is an annualized discount yield for a future that requires the delivery
of a 3 month T-bill with a face value of $1,000,000. Since it is quoted to two decimal places, the
smallest price change (or "tick") is one basis point, 0.01%.
10.1.2 T-Bond Futures
The most active Treasury futures are the Treasury bond and Treasury note futures traded at the
Chicago Board of Trade. Both futures contracts trade in units of $100,000 and expire in May, June,
September, and December.
!
Caution One measure of activity in these contracts is called "open interest." This is the
number of contracts outstanding.
Example: At the close of trading on Friday, September 16, 1994, the reported open
interest for Treasury bond futures was 264,993. The open interest for T-note futures was 269,745
and 188,736 for the 10- and 5-year notes, respectively. At this same time, there were 17,238
contracts outstanding for T-bill futures.
The quoted price for a T-bond or T-note future is the same as the price for T-bonds and T-notes
(which is different from T-bill futures). The quoted price is given in thirty-seconds not - decimals.
T-bond futures can be settled with any T-bond that has 15 or more years to first call or maturity
(whichever comes first). To add to the settlement complexity, this flexibility is combined with a
number of settlement options that the seller of the future can choose to exercise. In this section,
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