Question
The underlying Euro-bund futures are long-term German debt instruments with maturities ranging from 8.5 to 10.5 years. Eurex is where they're traded. Assume that the
The underlying Euro-bund futures are long-term German debt instruments with maturities ranging from 8.5 to 10.5 years. Eurex is where they're traded. Assume that the underlying 2% German bund is trading at 108, with 0.083 in interest (one-half of a month since the last coupon). One month from now, the euro-bund futures contract will expire. The underlying bund will have accrued interest of 0.25 at contract expiration, there are no coupon payments due until the futures contract expires, and the one-month risk-free rate is currently 0.1 percent. r = 0.1 percent, and the conversion factor is 0.729535. = 1.5(2/12) = 0.25. In this case, we have T = 1/12, CF(T) = 0.867250, B0 (T + Y) = 108, FVCI0,T = 0, AI0 = 0.5(2/12) = 0.083, AIT = 1.5(2/12) = 0.25, and r = 0.1%.According to the carry arbitrage model, the equilibrium euro-bund futures price will be:
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