Korean Government Bond Futures: Contract Settlement and Pricing

Summary

The document distinguishes cash-settled bond futures, whose value is linked to a calculated yield-based price, from physically delivered contracts, where conversion factors and the cheapest-to-deliver bond can shape futures pricing. The question concerns Korean government bond futures with three-, five-, and ten-year maturities and whether their settlement methods differ.

The answer reports that Bloomberg calculations indicated all three contracts were yield-based and cash-settled, and suggests the exchange document implying a different treatment for the ten-year contract was outdated. This is a brief, market-specific conclusion rather than a detailed contract specification or pricing derivation. Its evidence is a check against Bloomberg, so the claim may depend on the data and contract terms available at the time; traders modeling these instruments would need current exchange specifications to confirm details.

Key ideas

• Cash-settled bond futures can be priced using a yield-based measure.
• Physical delivery can involve conversion factors and a cheapest-to-deliver bond.
• The answer reports that Korean three-, five-, and ten-year bond futures all appeared yield-based and cash-settled in Bloomberg.
• The cited discrepancy is attributed to potentially outdated exchange documentation.

Tags

# Korean Bond futures market: is there a fundamental difference between 3yrs, 5yrs and 10yrs contracts?


# Korean Bond futures market: is there a fundamental difference between 3yrs, 5yrs and 10yrs contracts?












I would like to model Korean government bond futures. So far I know two concepts (just a short, incomplete description)

- cash-settled futures (e.g. Australia): The average yield of a basket of bonds is calculated and thereby a notional bond price. Quotation in $100-yield$.

- bond futures with physical delivery (e.g. Germany, US): Conversion factors for all bonds in a basket can be calculated which leads (with some more inputs) to a cheapest-to-deliver and the futures price corresponds more or less to the forward price of the cheapest-to-deliver (taking into account the conversion factor).

If I read this document, taken from page of "Korea exchange", correctly then the Korean 3yr and 5yr futures belong to class (1) and the 10 yr belongs to class (2). But when I go to Bloomberg it seems that all three futures contracts are of class (1) - yield based, cash settled.

Are there any experts around for these markets? Is it true that all 3 futures contracts work the same way, namely yield based and cash settled?

## Answer by Richi Wa (score 3, accepted)

https://quant.stackexchange.com/a/10304

Checking calculation with Bloomberg it seems that all 3 Korean bond futures contracts are of type (1). The pdf in the link must be out-dated.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.