What is adjusted futures price?
The adjusted futures price is the market price of a bond future that has been adjusted by multiplying it by the conversion or price factor of a specific, deliverable bond. This concept is important in the trading of bond futures, where different bonds can be delivered to meet the future contract obligation. The conversion factor is used to normalise the different bonds that can be delivered so that they become comparable in terms of their value.
Important concepts:
- Cheapest-to-deliver: The bond that is cheapest to deliver against the futures price.
- Conversion factor: A factor that is used to adjust the market price of a bond so that it can be compared with the futures price.
- Notional bond: A hypothetical bond that is used as a reference for the price calculation of futures.
Understanding the adjusted futures price helps investors in evaluating the most cost-effective way to meet their delivery obligations in the futures market.