Explain the pricing of fixed-income forwards and futures, and work out their no-arbitrage value and say what it means
The idea
Bond forwards and futures follow carry arbitrage on the full price. Compound the full price to delivery, subtract the future value of coupons received before then and the accrued interest at delivery, and, for futures, divide by the delivered bond's conversion factor, so the quoted futures price is F0 = [(B0 + AI0) × (1 + r)^T − AIT − FV of coupons] ÷ CF. The short picks the cheapest-to-deliver bond, which drives the price. A bond forward is worth the present value of the new less the original forward price; a futures position is marked to market daily and is worth zero after each settlement. The trap is omitting the conversion factor or the accrued interest.
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