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What is Special about Eurex Fixed-Income Futures?

Fixed-income futures contracts at Eurex are always based on a notional underlying instrument.

Example:

Underlying of the Euro Bund Future:

Notional long-term debt security issued by the German Federal Government with a term of 8.5 to 10.5 years at a rate of 6 percent.

Choosing a fictitious bond has a clear advantage. If there were future contracts on single, actually existing bonds the liquidity would be split up onto many different futures. On the other hand a notional bond cannot be delivered. Delivery nonetheless takes place using a basket consisting of similar bonds.

Settlement:

A delivery obligation arising out of a short position in a Euro Bund Futures contract may only be satisfied by the delivery of specific debt securities - namely, German Federal Bonds (Bundesanleihen) with a remaining term upon delivery of 8.5 to 10.5 years. The debt securities must have a minimum issue amount of EUR 5 billion.

The seller of the future can choose which of the bonds designated by Eurex (as deliverable for each respective delivery date) he wants to use for delivery. As it would make a difference if a bond with a coupon of 8 percent and a term of 10 years were to be delivered, or a bond with a coupon of 5 percent and a term of 8.5 years was selected, all deliverable bonds are equalised to the contract specification terms via a conversion factor:

deliverablebonds

The deliverable bonds are displayed on a special window that is accessible to exchange members. The current CTD is indicated by a "Y". The deliverable bonds shown here are shares that can be used to fulfill delivery requirements in the Euro Bund future at expiration date in September 2012. In the same way, deliverable bonds for all futures on bonds of Germany, Italy (BTP futures), France (Euro-OAT futures) and Switzerland (CONF futures) can be recalled.

Although the conversion factor offsets differences between these various bonds to the greatest possible extent, small differences remain, which lead to one of the deliverable bonds becoming the so-called cheapest-to-deliver, or CTD in short, from the viewpoint of the seller.

Deliverable bonds and notified bonds from deliveries in the past may also be found in the internet on the website of Eurex Exchange – Fixed Income Derivatives.

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