Question 7 (Interest Rate Futures) - (20 Marks) Part A (10 Marks) The cheapest-to-deliver bond in a Treasury bond futures contract is an 8% coupon bond, and delivery is expected in 296 days. Coupon payments on the bond will be made in 175 days and 357 days from now. The last coupon date was 9 days ago. The rate of interest with continuous compounding is 5% per annum for all maturities (i.e. term structure is flat). The conversion factor for the bond is 1.2191. The current quoted bond price is $137. Calculate the quoted futures price for the contract (i.e. settlement price of futures contract). Part B (5 Marks) A Eurodollar futures quote for the period between 5.1 and 5.35 year in the future is 97.1. The standard deviation of the change in the short-term interest rate in one year is 1.4%. Estimate the forward interest rate in an FRA. Part C/5 Marks) What do you know about the conversion factor for a bond