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Calculating U.S. Treasury Futures Conversion Factors
Tue Feb 01 12:40:00 CST 2011 CT
Related Keywords: Interest Rates, Strategies & Techniques, Tool & Analytics
Related Keywords: Interest Rates, Strategies & Techniques, Tool & Analytics
Every cash note or bond that is eligible for delivery into a Treasury futures contract has a conversion factor that reflects its coupon and remaining time to maturity as of a specific delivery month. A conversion factor is the approximate decimal price at which $1 par of a security would trade if it had a six percent yield-to-maturity.
A common misconception is that the DV01 of a Treasury security remains fixed as the yield of the instrument changes. In truth, the price-yield relationship of a Treasury security is nonlinear; as yields fluctuate, the DV01 of a Treasury security changes. This short piece will take you through the math behind thee conversions.
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