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Answer: The quoted futures price is found by dividing the clean futures price by the conversion factor.
**Correct Answer: D** **Explanation:** D is correct. The clean futures price is equal to the quoted futures price multiplied by the conversion factor, so the quoted futures price will be found by dividing the calculated clean futures price by the conversion factor. A is incorrect. Both the cheapest-to-deliver bond and the bond delivery time must be known. B is incorrect. The price of the bond used in calculating the quoted futures price is the dirty cash price, which is clean price plus accrued interest. C is incorrect. The dirty futures price obtained must be compounded forward at the risk-free rate to the time of delivery to find the clean futures price.
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An analyst on the US Treasury derivatives desk at an investment bank is researching how US Treasury bond futures prices are determined. The analyst examines the assumptions and steps required to calculate the quoted futures price from the prices of Treasury bonds that can be delivered into the futures contract. Which of the following statements is correct regarding this calculation process?
A
The quoted futures price can be calculated as the value of a futures contract on an asset providing known income, and the only information necessary to know is the underlying bond's delivery time.
B
The price of the bond used in calculating the quoted futures price is the quoted clean cash price minus accrued interest.
C
The clean futures price obtained from the clean cash price must be compounded forward at the risk-free interest rate to the time of delivery.
D
The quoted futures price is found by dividing the clean futures price by the conversion factor.