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EURO-FUTURE STRIP HEDGEAbukar M Ali |
This worksheet is an educational tool designed to demonstrate the workings of the Bloomberg TED page. A primary use of this page is to calculate the hedge required for a holding of a cash bond, when this hedge is constructed using exchange-traded 90-day interest-rate futures contracts. The user can use the worksheet to calculate an approximation of the futures strip required to hedge a long or short position in a cash bond. For illustration, we show the TED page when it has been used to calculate the strip hedge for a $100m long position in the Treasury 3 7/8% 2013. PLEASE NOTE: this example is for a bond whose maturity date extends beyond the maturity of the longest-dated futures contract. If the bond has a maturity date that does not extend beyond a certain contract, then these remaining should not be considered. |
Cell |
Description |
| Nominaliamountm | The nominal value of the bond position being hedged |
| Spread | The difference between the bond yield-to-maturity and the implied futures rate |
| Contract | This is the specific contract used in the strip. The designation follows the exchange-traded custom, with H, M, U and Z used to designate contracts expiring in March, June, September and December each year |
| Days | The term to maturity of the specified futures contract |
| Price | The price of the futures contract |
| Rate | The implied 90-day Libor rate on maturity implied by the price of the futures contract |
| Di | The discount factor derived from the futures contract, given by 1 + (EDi-TED) * days_i/360 for spread adjusted hedging |
| Face value | The nominal amount of the bond position |
| Present value | The present value of the face value, given by Payment * (di*di2*di3* ...*din)^-1 |
| Nr of contracts | The number of contracts required in the futures strip to hedge the bond holding |
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