Description
Swap futures employ an internal rate of return formula to express the fixed rate of a forward starting swap as the price of a 6% coupon bond. Upon expiration the contract is cash settled to the rate on Reuters ISDAFIX3 page, which is determined by a survey of swap dealers polled at 10:00 a.m. Chicago Time and posted at 10:30 a.m. Chicago Time.

Key Benefits
The CBOT’s Swap future complex reduces operational and regulatory risks associated with the increasing size of outstanding OTC interest rate derivatives.

• Swap futures reduce the heavy administrative cost of trading plain vanilla swaps by aggregating all outstanding trades into a single line item.    
• The guarantee of the CBOT clearing services provider mitigates credit risk by serving as the ultimate counterparty to all trades, making CBOT Swap futures comparable to the strongest credits in the OTC market.

Pricing & Risk Modeling
Fair value of a swap future contract can be computed with just three pieces of data:  Treasury Yield + Swap Spread + Forward Start (difference in yield between the forward starting swap and a spot swap).  The resulting yield determines the contract price when inserted into the settlement formula.

Settlement Formulas:
5-yr: $100,000*(6/r+(1-6/r)*(1+r/200)^-10)
10-yr:  $100,000*(6/r+(1-6/r)*(1+r/200)^-20)

Likewise the DV01 of the contract is defined as the price difference that occurs when a ½ basis point is added and subtracted from the underlying swap yield and inserted into the settlement formula.

Pricing Example:
Treasury Yield + Swap Spread + Forward Start = Underlying Swap Yield
4.865 + .54 + .0124 = 5.4174 
Inserting this yield into the 10-year settlement formula returns a fair value of 104-14.5

DV01 Example:
5.4174 +/- .005 = 5.4224 & 5.4124, which returns swap prices of 104-13.24 & 104-15.75, this price difference in ticks multiplied by $31.25 gives us a DV01 of $78.52 per contract. 

For more information on CBOT Swap futures, contact:
Steve Dayon, CBOT Business Development, 312-435-7225

The content in this presentation is proprietary to the Board of Trade of the City ofChicago, Inc. (“CBOT”), and may not be disseminated to any third parties without the express written permission of the CBOT.  While the information contained in this presentation is believed to be reliable, it is intended for purposes of information and education only and is not guaranteed by the CBOT as to accuracy, completeness, nor any trading result, and does not constitute trading advice or constitute a solicitation of the purchase or sale of any futures or options.  The Rules and Regulations of the Chicago Board of Trade should be consulted as the authoritative source on all current contract specifications and regulations.

© 2006 Board of Trade of the City of Chicago, Inc. ALL RIGHTS RESERVED.

 - CBOT Interest Rate Swap Futures:Pricing and Risk Modeling Basics - 04.25.2006