## 2. How frequently are index prices and risk metrics published by Bloomberg?

Bloomberg currently only publishes end-of-day prices for these indices. Risk metrics including option-adjusted spread (OAS), option-adjusted duration (OAD) and option-adjusted spread duration (OASD) are also published at end-of-day on the Security Description (DES) page.

The LUACTRUU Index also has an associated Bloomberg U.S. Investment Grade Corporate Bond Tradable Tracker Index (I36357US Index), which is calculated in real time and displayed on the Bloomberg terminal during U.S. corporate bond market trading hours. A tradeable tracker index for the LHVLTRUU Index will be available soon.

## 3. How is the I30287US Index (underlying DHB) related to the LUACTRUU Index (underlying IQB)?

The I30287US Index (underlying DHB) is derived by combining the LUACTRUU Index with key-rate, duration-matched short positions in Treasury futures across the curve. Therefore, the OASD of I30287US is equivalent to that of LUACTRUU. While LUACTRUU has a given option-adjusted duration (OAD), I30287US is designed to have an OAD of zero since it is duration hedged.

## 4. How do I calculate DV01?

The DV01 of a Credit futures contract can be estimated using the option-adjusted duration (OAD) of the underlying index:

E.g., to estimate the DV01 of the IQB contract, assume that the OAD of the underlying LUACTRUU Index is 6.97 and that the current futures price is 3,285.50. The contract multiplier for IQB is \$30. Then the estimated DV01 = 6.97 x 3,285.50 x 30 x 0.0001 = \$68.70.

Note that the above estimation assumes that Index OAD is equal to futures OAD. This poses two potential issues:

• In reality, the OAD of the futures contract is also affected by the sensitivity of the basis between the futures price and the index price to risk-free rates. This basis is sensitive to risk-free rates due to financing (as shown in the futures fair value calculation in Question 7)
• While the futures price changes throughout the trading day, Bloomberg currently only publishes the end-of-day OAD for the underlying indices. End-of-day OAD may not be an accurate representation of the true OAD at the time of the observed futures price.

## 5. How do I calculate CR01?

CR01 is calculated in a similar manner to DV01 (see Question 4), except the OASD of the underlying index is used instead of the OAD:

To calculate CR01 of DHB, the OASD of LUACTRUU is used (see Question 3).

## 6. If there is a change in the DHB price, what is the corresponding change in credit spreads?

A 1% rise in the credit spread embedded in DHB would result in a percentage fall in the DHB price equal to the OASD. The OASD of LUACTRUU represents the sensitivity of DHB to credit spreads (see Question 3).

E.g., if the OASD is 6.87, then a 1% rise in credit spread would result in a 6.87% fall in DHB price. Thus a -0.15% change in price corresponds to an increase in the credit spread by 0.15% / 6.87% = 0.022% or 2.2 basis points.

## 7. How do I calculate the fair value of a Credit futures contract relative to its underlying index?

The fair value of a Credit futures contract is based on the spot value of the underlying index and financing:

Assuming an annual compounding rate and an Actual/365 day count convention:

Where R is the prevailing short-term money market rate. Note that currently Bloomberg only publishes end-of-day prices for the underlying indices (see Question 2).

This fair value calculation is based on a no-arbitrage relationship between the futures contract and the underlying index. Since the futures contract is cash settled to the prevailing spot index at expiry, an arbitrageur can purchase the index before expiry (or more specifically the portfolio that makes up the index), finance that purchase at the relevant prevailing interest rate and simultaneously short a futures contract. If the total price to purchase and finance the index differs from the futures price, arbitrageurs would arbitrage the spot and futures markets until the futures price reflects its fair value.

The fair value futures price can be compared with an observed futures price to evaluate the richness/cheapness of the futures market.

## 8. How do I calculate the implied funding rate of a credit futures contract?

Start with the fair value equation from Question 7. Substitute the fair value futures price with the observed futures price and R with the implied funding rate:

Then rearrange to make Implied Funding Rate the subject of the equation:

The implied funding rate is the theoretical return you would earn if you bought the underlying index, sold futures short against it and held the position until expiry when the futures contract is cash settled to the spot price of the index. To evaluate the richness/cheapness of the implied rate/return, compare it to a relevant prevailing short-term money market rate.

## 9. How do I calculate the fair value of the futures roll?

The price of the roll is equal to the spread between the nearby and deferred futures contracts:

Note that Credit futures calendar spreads consist of one long position in the nearby contract month and one short position in the deferred contract month. The fair value equation from Question 7 can also be used to calculate the fair value of the roll.

## 10. How do I determine the richness/cheapness of the roll?

To evaluate the richness/cheapness of the roll, compare the implied funding rate of the roll with the prevailing funding rate.

The implied funding rate of the roll can be derived from the fair value equation in Question 9.

To determine richness/cheapness:

• If roll implied funding rate < prevailing rate → roll is “cheap”
• If roll implied funding rRate > prevailing rate → roll is “rich”

## 11. What is the tracking error between Credit futures and their underlying indices?

The table below shows annualized tracking error between each Credit futures contract and its underlying index. Note that the sample size is small since Credit futures began trading on June 17, 2024.

Futures contract

Underlying index

Tracking error (annualized)

IQB

LUACTRUU Index

1.29%

HYB

LHVLTRUU Index

2.26%

DHB

I30287US Index

2.76%

*Last Updated 8/5/2024

All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.

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