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The conversion factor (CF) for the cheapest to deliver bond (CTD) is an important concept used to price fixed income futures. The conversion factor is needed to determine the principal invoice price. This is the price that the short party of a fixed income futures will receive upon settlement.
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26 lut 2016 · Back to your question, conversion factor is (approximately) the price (divided by 100) of a bond assuming its yield to maturity as of the first delivery date is 6%. So it does depend on the maturity of the bond in question.
2 lis 2020 · By dividing the duration of the CTD by its conversion factor, we arrive at a number that approximates the sensitivity of the futures price to the yield of the CTD. Recall that duration of a bond is a measure of its price sensitivity to the change in its yield.
Hull defines the conversion factor for a bond as the "quoted price the bond would have per dollar of principal on the first day of the delivery month on the assumption that the interest rate for all maturities equals 6% per annum."
19 sty 2024 · The conversion factor represents the estimated decimal price at which $1 par value of the security would trade if it had a yield to maturity of 6%. The conversion factor serves a pragmatic role by standardizing the valuation of deliverable securities.
Conversion factors are intended to normalize the price of deliverable bonds with that of the futures contract. They can essentially be viewed as a form of duration adjustment (or hedge ratio), however unlike duration / hedge ratios (which change constantly), conversion factors remain static for the life of the contract.
11 lis 2024 · With this calculator, you can calculate the conversion factor of a bond. The conversion factor is a key element in hedge calculations and, more generally, in the analysis of all market operations including bonds and futures. Mathematically, it is the bond's clean price, using the future contract's delivery date as value date and the future's ...
