Duration of Interest rate future

[abhiu1991]

Hi all,
Is there any mechanism by which we can calulcate the duration of interest rate future? If it's a single bond future and not having a basket of securities is it the right approach to use the duration of the underlying as the duration of the IRF?

 

[Matthew Graves]

Duration of the future is not going to be exactly the same as that of the underlying bond. Consider that the long future position is not entitled to any of the bond cash flows between now and the future maturity date whereas the bond holder is.

The best way (with all these exercises) is to build a spreadsheet to price the bond at the future maturity date and then discount back to present. Once you have this you can flex any of the inputs to obtain the various sensitivities.

 

[abhiu1991]

Thanks for the reply.
Please correct if I'm wrong.
1. The bond can't be priced on the maturity date of IRF using the ytm of the bond underlying IRF. Either price or ytm I need to fix.

2. Also which curve will be used to discount the price to present? As the zero curve is observed from the traded price itself, what other risk free curve can we use?

 

[Matthew Graves]

YTM is only relevant if you want modified duration, which is an ultra simplistic measure. Price the bond using OIS curve to discount + issuer hazard rate curve.