I am not able to understand the para of bond futures that is : What will be the linkage between notional stock and cash market ? Why the delivering party choose the bond which is cheapest to deliver ? Why the coupon may not be equal to that of the notional bond which underlies the contract settlement price ? It will be good if someone explains this with an apt example. Thanks in advance.
Hi Dikshay Please see below What will be the linkage between notional stock and cash market ? It just means that the delivering party can either provide an eligible bond or its cash value (in the market). Why the delivering party choose the bond which is cheapest to deliver ? If the delivering party has a choice of eligible bonds that it can deliver, it will of course want to choose the cheapest one to save money. Why the coupon may not be equal to that of the notional bond which underlies the contract settlement price ? If the delivering party is delivering a different bond to the one specified, then then adjustment needs to be made for the fact these bonds may have different coupon rates for example. Hope this helps Best wishes Stuart Stuart Underwood ActEd Tutor
