I'm trying to understand valuation of the Euro BUND Future.

As to my understanding, the price of the future should be:

  • The price of a government bond issued by the Federal Republic of Germany
  • That bond must have a maturity date between 8.5 and 10.5 years from expiration of the futures contract
  • The bond must have an issue volume of at least 5 billion EUR
  • The price is converted by a conversion factor. That factor depends on the coupon. The conversion factor crosses 1 at a coupon of 6%.

Now, the current price of the September contract of the Euro BUND future (FGBLU19) is (at the time of writing) 172.35 EUR.

Now I looked up bonds that meet the criteria, and found: ISIN DE0001135143 (in German, it's tricky getting quotes for German bonds in English).

Now to my checklist: - Maturity date is January 4th, 2030. From September 6th, 2019 (Futures contract expires) that's less than 10.5 years and clearly more than 8.5 years. - Issued by Federal Republic of Germany, checks out - Issue volume more than 9 billion, fine - Coupon is 6.25%, that's even more than 6%. Conversion factor should be even better than the 1 I'm assuming (it should be 1 at 6%)

Now the current price (as of writing) of this bond is 170.59%.

Even without the conversion factor (which should make things even better), that looks to me like an arbitrage of 1.75% (when selling a futures contract and buying the bond, holding till September).

Finding that big of an arbitrage so easily makes me skeptical, so I'm assuming I'm overlooking something. What is it?


Sometimes it helps writing it down, I think I figured it out:

  • I forgot the interest between September and January
  • At 6.25%, that's around 2.1% for four months
  • That roughly matches the discrepancy I've noticed, with the conversion factor that could very well check out

So, problem solved, I guess.


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