Q. Will a change in the coupon affect the dollar volatility of the bond and note contracts?
A.The higher conversion factors associated with a 6% notional coupon will reduce the converted dollar values of basis points for the bond and note contracts. But the change in coupon will cause the contracts to track longer duration securities to somewhat offset this effect.

A brief example shows how this could work. On April 12, 1999, the June T-bond contract tracked the 11 1/4 of Feb 15 (that is, that issue was the cheapest-to-deliver Treasury), which had a DV01 (dollar value of a basis point) of 0.1448 and a 1.2858 conversion factor. A June 6% coupon contract would track the 8 1/2 of Feb 20 which, under the 8% regime, had a DV01 of 0.1494 and a 1.0500 conversion factor.

The conversion factors for these two issues, if the 6% coupon was in effect, would be 1.5250 and 1.3003, respectively.

To find the futures DV01, divide the CTD DV01 by its conversion factor. The table shows that the higher 6% conversion factors result in lower DV01s.

Comparing 8% and 6% Conversion Factors and DV01s

8% 6%
Cash Conversion Futures Conversion Futures
DV01 Factor DV01 Factor DV01
11 1/4 0.1448 1.2858 0.1126 1.525 0.095

8 1/2 0.1494 1.05 0.1423 1.3003 0.1149


But, because the 8 1/2 of Feb 20 is CTD into the June 6% contract, the futures DV01 is slightly larger than the actual 8% futures DV01, which is based on the 11 1/4 of Feb 15.

Suppose you went long 100 contracts of June T-bond futures in both the current 8% and the upcoming 6% contracts. Assuming an instantaneous 25 basis point change in yields, the table shows that the 6% contract would outperform the 8% contract by $7,112 to the upside and by $4,631 on the downside.

Gain or loss for 100 contract long futures position

Yield Change Initial -25 Basis +25 Basis
Price Points Points
8% Futures 123-02 286,032 -277,101

6% Futures 102-28 293,144 -281,732

Difference 7,112 -4,631


Although details will vary as market conditions change, you can see that the shift to a 6% notional coupon promises to generate extra trading opportunities.

For more information on the new 6% contracts, visit our web site.

Or call:

Nancy Kaplan
312-347-3808

Cynthia Williams
312-435-7216

Thomas Cosgrove
312-347-3823