Bond Futures
Bond futures are financial derivatives that obligate the contract holder to purchase or sell a bond on a specified date at a predetermined price. A bond futures contract trades on a futures exchange market and is bought or sold through a brokerage firm that offers futures trading. The terms (price and the expiration date) of the contract are decided at the time the future is purchased or sold.
Definition: Bond futures are financial derivatives where the contract holder is obligated to buy or sell bonds at a predetermined price on a specified date. Bond futures contracts are traded on futures exchanges and can be bought or sold through brokerage firms that offer futures trading. The terms of the contract (price and expiration date) are determined at the time of purchase or sale.
Origin: The origin of bond futures can be traced back to the 1970s when the Chicago Board of Trade (CBOT) introduced the first bond futures contract to hedge interest rate risk. Since then, bond futures have become an important risk management tool in financial markets.
Categories and Characteristics: Bond futures are mainly divided into government bond futures and corporate bond futures. Government bond futures typically use treasury bonds as the underlying asset, featuring high liquidity and low credit risk; corporate bond futures use bonds issued by companies, with relatively higher liquidity and credit risk. Characteristics of bond futures include high leverage, standardized contracts, and centralized clearing.
Specific Cases: 1. An investor expects interest rates to rise in the future, so they sell treasury bond futures contracts in the futures market to hedge against the price decline risk of their held spot treasury bonds. 2. A company expects future financing costs to rise, so it buys corporate bond futures contracts in the futures market to lock in future financing costs.
Common Issues: 1. The leverage effect of bond futures can amplify both gains and losses, so investors should use them cautiously. 2. At contract expiration, investors need to be aware of the delivery method to avoid unnecessary delivery costs due to failure to close positions in time.
