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After completing this reading, you should be able to:
- Identify the most commonly used day count conventions, describe the markets that each one is typically used in, and apply each to an interest calculation.
- Calculate the conversion of a discount rate to a price for a US Treasury bill.
- Differentiate between the clean and dirty price for a US Treasury bond; calculate the accrued interest and dirty price on a US Treasury bond.
- Explain and calculate a US Treasury bond futures contract conversion factor.
- Calculate the cost of delivering a bond into a Treasury bond futures contract.
- Describe the impact of the level and shape of the yield curve on the cheapest-to-deliver Treasury bond decision.
- Calculate the theoretical futures price for a Treasury bond futures contract.
- Calculate the final contract price on a Eurodollar futures contract.
- Describe and compute the Eurodollar futures contract convexity adjustment.
- Explain how Eurodollar futures can be used to extend the LIBOR zero curve.
- Calculate the duration-based hedge ratio and create a duration-based hedging strategy using interest rate futures.
- Explain the limitations of using a duration-based hedging strategy.
0:00 Introduction
0:29 Learning Objectives
1:28 Day Count Conventions
3:22 Clean Price vs. Dirty Price
3:57 T-Bill Prices
5:47 U.S. Treasury Bonds Futures Contracts
9:41 Cheapest to Deliver Bond
12:22 The Final Price of Eurodollar Futures Contracts
15:16 Duration-based Hedge Ratio
19:53 Limitations of a Duration-based Hedging Strategy
21:10 Book 3 - Financial Markets and Products Chapter 9