Why CME is using approximations for CF on treasury FWD?

mellisacat · September 14th, 2011, 10:42 pm

According to this: http://www.cmegroup.com/trading/interes ... actors.pdf, the conversion factor is calculated based on the assumption that the coupon of the CTD contract is 6%. So a small difference exists between the actual delivered contract for the short and the price paid by the long, thus always benefiting the short. It's not very hard to figure out the exact form to calculate CF. Is there any practical concerns behind CME's CF definition? Like to encourage volumes on the short side? Anyone? Thanks.

acastaldo · September 15th, 2011, 12:50 am

Quotecalculated based on the assumption that the coupon of the CTD contract is 6%No, it is based on the assumption that the (hypothetical) bond underlying the contract has 6% coupon, and that the bond being delivered has a coupon other than 6%. It then tries to find a relationship between the two bonds, the hypothetical and the actual bond under consideration.This is so that a single future contract can be fulfilled by delivering multiple bonds, each with a different coupon. This is not an approximation, this is designed into the contract.