Treasury Futures and Options

 

Treasury futures are derivatives whose price moves in response to the underlying cheapest to deliver Treasury bond, and if taken to delivery will deliver into the bond. Options on these futures contracts provide the right, but not the obligation, to make or take delivery. Currently, there are futures contracts for 2-Year, 5-Year, 10-Year, and 30-Year bonds, as well as a new Ultra Bond future. Expiration on futures occurs in quarterly increments (March, June, September, and December), while in options you have weekly, monthly, and quarterly expirations that deliver into a futures contract. Pricing on the Treasury futures is traded in 32nds, while options trade in 64ths. Both are based on a 6% coupon. Each contract represents a notional value of $100,000, with exception of the 2yr note that has a contract size of $200,000. These derivatives are used to hedge and adjust interest rate exposure. Treasury futures and options are traded at the CME, and are among the most liquid products in the world.