The US Treasury bond futures are among the most liquid futures contracts in the world. Despite their widespread use, bond futures – in the US as well as other economies such as Japan (JGBs), Germany (Bunds) and the UK (Gilts) – are not often fully appreciated for their complexity. Bond futures are usually considered to be “vanilla” derivatives, but they possess non-trivial optionality which can be quite difficult to quantify and which impacts not only prices but Greeks as well.

The embedded optionality in a bond future typically arises from delivery options available to the seller of the contract, such as the ability to choose from a range of eligible Treasury bonds to deliver to the buyer, or the ability to deliver the bond to the buyer on any day during the contract’s expiration month. Since these embedded options impact not only the price but also the Greeks of the bond future, it is important that users of the bond future – especially hedgers – accurately assess the embedded optionality so their P&L and position Greeks behave as expected.

On Thursday, March 13, 2014 featured speaker Mark Hadley, Vice President of Financial Engineering, discussed ways practitioners quantify embedded options in bond futures to achieve greater accuracy in pricing and Greeks calculations.

Mr. Hadley covered:

• Primer on bond futures
  • Their role as important hedging instruments
• The embedded options within bond futures
  • Cheapest-to-deliver option ? a basket option
  • Timing option for short deliveries ? a Bermudan option
• Approaches to valuing the embedded options
• Impact of the embedded options on Greeks
  • Corresponding impact on hedging activities
  • Case study with sample calculations

Featured Speakers:

Mark Hadley, FSA, CFA, Vice President, Financial Engineering, Numerix
Mr. Hadley has worked with numerous variable annuity insurers across the industry, whose exposure spans all corners of the globe. He specializes on the capital markets side focusing on financial market modeling, hedge strategy design, and hedge execution. In his current role with Numerix, he consults with banks, hedge funds, and insurance companies across the globe on how to manage exotic derivative exposure. Prior to Numerix, Mr. Hadley worked with Milliman’s Financial Risk Management group, where he designed and executed several VA and EIA hedging strategies.

Moderator: Jim Jockle, Chief Marketing Officer
Mr. Jockle leads the company's global marketing efforts, spanning a diverse set of solutions and audiences. He oversees integrated marketing communications to customers in the largest global financial markets and to the Numerix partner network through the company's branding, electronic marketing, research, events, public relations, advertising and relationship marketing.

Prior to joining Numerix, he served as Managing Director of Global Marketing and Communications for Fitch Ratings. During his tenure at Fitch, Mr. Jockle built the firm’s public relations program, oversaw investor relations and led marketing and communications plans for several acquisitions. He also oversaw the brand development of a new company dedicated to the enhancement of credit derivative and structured-credit ratings, products and services. Prior to Fitch, Mr. Jockle was a member of the communications team at Moody's Investors Service.