The following US Treasury bond (semi-annual, act/act) is deliverable into the 10 Year US Treasury Note futures contract trading on the CME and is the CTD:

2.75% 15/11/2030 priced at 109-09 for value 2 August 2021 (NB: remember US treasuries are priced in fractions and so 09 stands for 9/32nds)

This contract has a notional value of USD 100,000

a) This bond has a conversion factor of 0.5840. Explain what this is, how it is calculated and how it is used in the futures market.

b) Using the bond above as an example describe and illustrate the process for calculating a forward bond price and how this would equate to the SEP bond futures price. Use a repo rate of 0.5% in your calculation and assume the contract expires on 12 September. What is meant by the adjusted bond price and again show this value for the bond above.

c) If you were to hold a position of USD 10 million in this bond how many contracts would you need to hedge your position? Would this be true if your position were in a bond that was not the CTD and explain why this is or is not so.

d) What is meant by the gross and net basis in the futures market? What is meant by buying the basis and how can this trade make money for you?