FIN 401 Lecture Notes - Lecture 10: Accrued Interest, Transaction Cost, Repurchase Agreement

• School: Ryerson University
• Department: Finance
• Course: FIN 401
• Professor: Thomas Barbiero

Document Summary

3. (delivery options) the u. s. treasury bond futures contract contains several imbedded options. First, the wild card option results from a difference in the closing times of the spot and futures markets. The treasury bond futures contract stops trading at 3:00 p. m. eastern time. The spot market for treasury bonds operates until 5:00 p. m. eastern time. The option exists only during the delivery month. Second, the holder of the short position has the right to deliver any of a number of acceptable bonds, known as the quality or switching option. Sometimes the holder of the short position will be holding a bond that is not the best to deliver. A profit is sometimes possible by switching to another bond. Third, because the last day for trading a t-bond futures contract is the eighth-to-last business day of the delivery month and delivery can take place during the remaining business days, there is an end-of-the-month option.