Bond Futures

A Bond Future is a contractual obligation for the contract holder to buy or sell a bond on a specified date at a predetermined price. Prices and dates are determined at the time the future is purchased. Futures are available on single stock bonds (currently government) and indices.

Benefits

• Gain similar exposure to interest rates as spot bonds but at a fraction of the cost
• Traded for hedging, speculative, gearing and arbitrage purposes
• Investors can short sell an asset they do not physically own at the time
• Gearing: Futures settle in arrears and thus investors only need to post initial margin upfront
• Very little, if any credit risk as trades are guaranteed by SAFCOM
• Replicates the same trading strategy as trading a spot bond and then entering into a repo transaction

Who should use this product?

• Investors looking to enhance the long-term performance of a portfolio of assets
• Hedgers seeking to protect an existing portfolio against adverse interest rate movements
• Speculators hoping to make a profit on short-term movements in prices
• Arbitrageurs looking to profit from price differentials of similar products in different markets

How to use this product?

• Bond futures are quoted in the same way as the underlying market, namely a yield-to-maturity (YTM) basis.
• The buyer (long position) of the future is obligated to purchase the underlying bond at the agreed price on expiry
• The seller (short position) of the future is obligated to sell the underlying bond at the agreed price on expiry
• Bond futures are conventional, fully margined, physically settled futures contracts defined on R100,000 nominal of exchanges underlying bonds