I am from 2024 and the 4th bond in the example spread sheet will expire in Nov this year. Thank you so much for the video, its easy to understand and super helpful.
Actually I'd like to take the FRM Nov/2012 exam, so I want to clarify the cheapest-to-delivery problem because I couldn't figure it out for many years since my university life several years ago.........To be frank, I'm just surprised that you made these vivid tutorials in youtube, and your workings are just fantastic!
This video is simple and easy to understand; thank you. I'm just unsure as to how to calculate the conversion factor for those bonds rounded off to 3/12 or 9/12 of a period. If you could upload a part 2 to this it'll be nice!
The short positions, who are obligated to deliver, would probably get squeezed by traders who could go long the futures contract while buying the underyling bond ... unlike a healthy arbitrage, this would distort prices and probably reduce liquidity. Futures contracts, of any sort, need underlying commodities which cannot be "cornered"
You said there're many different eligible bonds that can be delivered by the short trader. Does the futures contract specify which specific T-bond is the underlying? (You said all of their maturities should be greater then 15 years, but in what specific remaining maturity? And what about the coupon? Does the contract specify these?)
What I'm just wondering is that, if the answer is yes, then the underlying bond characteristics should be unique to every futures contract, which means there should exist only one kind of deliverable bond (and there'll be no such idea of delivering the cheapest bond)...... e.g, commodities have many grades, so commodity futures do have a cheapest-to-deliver concerns (unless the commodity futures contract does require which grade to deliver)......but how come T-bonds also have different grades??
thank you for this video!,so the long pays the quoted price* Conversion Factor(CF)+ accrued interest and receives one of the eligible bonds, but the CF assumes that the yield is 6%, but what if in real life the yield is significantly less than 6%,wouldnt that mean that the long is actually receiving a bond with a higher price(since the bond price will actually be materially higher?many thanks!!
For the PV formula I noticed you divide the rate (6%), and the coupon by 2. Do you assume coupons are paid every 6 months ? Why this assumption ? I guess this is why you do the test iseven() ? But then why do we not divide by 4 so that its would work for the "FALSE" (3 months) as well ?
Hello *****. The credit conversion factor converts the amount of a free credit line and other off-balance-sheet transactions - with the exception of derivatives - to an EAD (exposure at default) amount. This function provides the basis for calculating the total EAD. Exactly how the CCF is calculated depends on the Basel II approach you use and on the type of underlying transaction.
Not a very useful presentation, as it does not explain at all how the conversion factor is used. It is as if someone made a 7 minute video of a chair showing in detail how it is built without mentioning that you sit on it
As expected, many comments already. I want to record my gratitude to the professor, who has made it so clear to a novice like me. May God bless you.
Treasury bond quotes
I am from 2024 and the 4th bond in the example spread sheet will expire in Nov this year. Thank you so much for the video, its easy to understand and super helpful.
Actually I'd like to take the FRM Nov/2012 exam, so I want to clarify the cheapest-to-delivery problem because I couldn't figure it out for many years since my university life several years ago.........To be frank, I'm just surprised that you made these vivid tutorials in youtube, and your workings are just fantastic!
This video is simple and easy to understand; thank you. I'm just unsure as to how to calculate the conversion factor for those bonds rounded off to 3/12 or 9/12 of a period. If you could upload a part 2 to this it'll be nice!
Perfect explanation, much clearer than in various books. thumbs up
Thank you, you would be surprised how hard it is to find a simple explanation of how to get the CF, your excel formula is all I needed.
@samakhable yes, thank you for spotting my mistake! I corrected the description above, thanks
thank you so much for telling us the intuition and reasoning behind this
Its crazy this video was published just two weeks before the Lehman Brothers bankrupacy.
The short positions, who are obligated to deliver, would probably get squeezed by traders who could go long the futures contract while buying the underyling bond ... unlike a healthy arbitrage, this would distort prices and probably reduce liquidity. Futures contracts, of any sort, need underlying commodities which cannot be "cornered"
Great explanation. Thanks!
wow amazing the way its explained !! , where to find the link for the excel ?
You said there're many different eligible bonds that can be delivered by the short trader. Does the futures contract specify which specific T-bond is the underlying? (You said all of their maturities should be greater then 15 years, but in what specific remaining maturity? And what about the coupon? Does the contract specify these?)
What I'm just wondering is that, if the answer is yes, then the underlying bond characteristics should be unique to every futures contract, which means there should exist only one kind of deliverable bond (and there'll be no such idea of delivering the cheapest bond)......
e.g, commodities have many grades, so commodity futures do have a cheapest-to-deliver concerns (unless the commodity futures contract does require which grade to deliver)......but how come T-bonds also have different grades??
thank you for this video!,so the long pays the quoted price* Conversion Factor(CF)+ accrued interest and receives one of the eligible bonds, but the CF assumes that the yield is 6%, but what if in real life the yield is significantly less than 6%,wouldnt that mean that the long is actually receiving a bond with a higher price(since the bond price will actually be materially higher?many thanks!!
I'm sorry perhaps my question is stupid but, can I know why the Fed and Treasury does not want to see a run on the issue?
For the PV formula I noticed you divide the rate (6%), and the coupon by 2. Do you assume coupons are paid every 6 months ? Why this assumption ? I guess this is why you do the test iseven() ? But then why do we not divide by 4 so that its would work for the "FALSE" (3 months) as well ?
So, how do you actually calculate the conversion factor?
Thank You for this !
Great! thanks for posting!
How can I download the spreedsheet? need to become a candidates? how?
i am sorry for my question. but can someone explain to me what a conversion factor is?
Hello *****. The credit conversion factor converts the amount of a free credit line and other off-balance-sheet transactions - with the exception of derivatives - to an EAD (exposure at default) amount. This function provides the basis for calculating the total EAD. Exactly how the CCF is calculated depends on the Basel II approach you use and on the type of underlying transaction.
Not a very useful presentation, as it does not explain at all how the conversion factor is used. It is as if someone made a 7 minute video of a chair showing in detail how it is built without mentioning that you sit on it
The first couple of minutes literally spelled out how the CF is used/its purpose.