1. Calculate the spot price(S) of each bond underlying the basket of treasury bond futures based on quotation.
1-1 Discount the future value of spot bonds at maturity at quotation yield to cover the time period between spot settlement day and coupon payment(2), and
1-2 Adjust it by the discount factor which is accrued interest during Present(P)~coupon payment(2)
Calculate the forward price(F) of each bond from the spot price using equation(A) or (B).
Where, F is Forward Price / S is Spot Price/ I is present value of the coupon during the life of the futures contracts/ r is risk Âfree interest rate applicable to time period / T is time to maturity.
Where, equation(B) is used when taking accrued interest into account.
2-1 Since the spot bonds provides income with a present value of I, subtract the present value of I which is discounted at discounting rate of (CD+CALL)/2 for the time period b/w Present(P) and Coupon payment (2) from the Spot Price(S) and then Forward Price at Futures settlement day(T) is calculated using equation(B).
3. Calculate the Forward yields (FY) on each of the above bonds calculating the forward price of each bonds by trial-and-error procedure.
4. Once the forward price and corresponding yields have been calculated, Mean Forward Yield (MFY) is then taken by a simple average.
5. Calculate the Basket Theoretical Price(BTP) using equation(C)