Delivery date in bond futures is the final date by which the seller of the futures contract must deliver the underlying bond to the buyer. The delivery date is determined by the exchange where the futures contract is traded, and it can be either a specific date or a period within a month. For example, the delivery date for U.S. Treasury futures is the last business day of the delivery month.
The delivery date is important because it affects the pricing of bond futures contracts. The seller of the futures contract has the option to choose which bond from a basket of eligible bonds to deliver, based on the cheapest-to-deliver (CTD) criterion. The CTD bond is the bond that minimizes the cost of delivering the futures contract, taking into account the conversion factor, the accrued interest, and the current market price of the bond. The CTD bond can change over time as the bond prices fluctuate. Therefore, the futures price reflects the expected value of the CTD bond at the delivery date, rather than the value of the underlying bond itself.
Bond futures contracts are usually closed out before the delivery date, as most traders use them for hedging or speculation purposes. However, the delivery process exerts significant influence on the futures price, as it represents the final settlement of the contract. The delivery process also ensures the convergence of the futures price and the spot price of the underlying bond at the delivery date, as any arbitrage opportunities would be eliminated by the market forces.
Basic Theory:
Bond futures contracts have a specified duration, which is the time until the contract expires. The delivery date is determined by adding the duration to the contract’s start date. Duration is a measure of a bond’s interest rate sensitivity, and it helps in understanding the potential impact of interest rate changes on the bond’s price.
Procedures:
- Determine Contract Start Date: Identify the start date of the bond futures contract. This is the date when the contract is initiated.
- Find the Bond’s Duration: Obtain the duration of the underlying bond. Duration is often expressed in years and measures the bond’s sensitivity to interest rate changes.
- Calculate Delivery Date: Add the bond’s duration to the contract start date using an appropriate Excel formula.
Excel Formula:
Assuming the start date is in cell A1 and the bond duration is in cell B1, the formula for the delivery date (in cell C1) would be:
=C1 + B1
Comprehensive Explanation:
Let’s consider a scenario to illustrate this concept:
- Start Date: January 1, 2024
- Bond Duration: 5 years
Using the formula, the delivery date would be:
=DATE(2024, 1, 1) + 5*365
Result:
The calculated delivery date is January 1, 2029.
Other Approaches:
- Using DAYS360 Function:
=START_DATE + DAYS360(START_DATE, DELIVERY_DATE) - Considering Business Days:
=START_DATE + B2*7
