Government Bond Futures: Cashflows

For Treasury bond and note futures contracts, the invoice price that the long pays the short must be calculated. We illustrate this calculation using an example, and outline the different price quotes for different Treasury bond and note futures contracts. We then derive the formulas for calculating the payoffs to the long and short positions, and demonstrate the use of these formulas with an example. To conclude we introduce the concept of the cheapest to deliver security, and outline the way it is identified.