Eugene Investment&Futures

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 ­free 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) 

First, the final settlement shall be made by cash settlement.
(1) The final settlement price shall be a figure calculated in accordance with the following formula, and rounded to three(3) decimal places. In the formula, r means a figure calculated by dividing the yield of the standard bonds for final settlement into 100. The Final Settlement. 

(2) The standard bonds for final settlement to Para.(2) shall be bonds designated by the change on a trading day immediately before the first trading day in the delivery month among the treasury bonds satisfying the requirements determined in the Detailed Rules

(3) The yield for settlement pursuant to Para.(2) shall be determined by getting the mean of yields of the following items and rounding the mean to four (4) decimal places. In this case, each yield shall be the yield calculated by getting the mean of yields of each bond notified by the Korea Securities Dealers Association and rounding the mean to four (4) decimal places.

1. Yield at eleven thirty (11:30) a.m. on the last trading day.

2. Yield excluding the highest and lowest yields among yields at ten (10:00), ten thirty (10:30) and eleven (11:00) a. m. on the last trading day. 

Since KTB Futures options is exercised after the market closed, the problem of overnight price change risk still remains. If you take an opposite position in futures before exercise, you can eliminate that risk.