10-Year Treasury Note Futures Contract
Kemper’s second investment idea is to purchase a 10-year Treasury note futures contract. The underlying 2%, semi-annual 10-year Treasury note has a dirty price of 104.17. It has been 30 days since the 10-year Treasury note’s last coupon payment. The futures contract expires in 90 days. The quoted futures contract price is 129. The current annualized three-month risk-free rate is 1.65%. The conversion factor is 0.7025. Doyle asks Kemper to calculate the equilibrium quoted futures contract price based on the carry arbitrage model.
Solution
A is correct.
The equilibrium 10-year quoted futures contract price based on the carry arbitrage model is calculated as
Q0 = (1/CF) × [FV(B0 + AI0) − AIT− FVCI].
CF = 0.7025.
B0 = 104.00.
AI0 = 0.17
.AIT = (120/180 × 0.02/2) = 0.67.
FVCI=0.
By the formula, the answer comes to be 149.74. Could some one please explain why we did 120/180 at Ait
because it is semiannual ignore the above formula and use the formula used in class it is same