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Functions and Applications

Functions and Applications

Risk hedging functions

Options contracts on government bonds futures provide to bondholders a way to hedge and effectively counter risks from fluctuations in bond prices.

Function to limit risks

Buyers of options on government bonds can gain profits by exercising their rights or selling the options when the prices of the government bonds move as they anticipated. If prices move in a direction opposite to that anticipated, the buyers of options can simply abandon the options, limiting losses to the premiums they paid to purchase them.

Achieving efficient asset management

Sellers of options on government bonds can bolster the yields of investment funds by receiving options premiums. Meanwhile, buyers can achieve the same profits as if they invested in actual bonds by paying premiums that are lower than the case of investments in actual bonds. Moreover, by using options on government bonds, institutional investors and other investors can achieve flexible portfolio management at lower costs.

Providing new investment methods

In addition to simple transactions based on a view of the market, opportunities to adopt a broad array of investment methods are presented. They include trading options on government bonds with other issues or with government bond futures and arbitrage trading between contract months or different products.

Examples

(note)
  • ･Brokerage commissions and other expenses have not been taken into account.

When options are settled through offsetting transactions

  1. An investor purchases one unit of call options on 10-year JGB Futures (a strike price of 139JPY) at 0.30JPY, and pays 0.30JPY * 100 millionJPY / 100JPY = 300,000JPY for the trade.
  2. The price of these call options later rises to 0.90JPY, so the investor sells them.
  3. The investor receives 0.90JPY * 100 millionJPY / 100JPY = 900,000JPY as sales proceeds, generating profits of 600,000JPY.

When options are settled without offsetting transactions

a. Example of Call Options on 10-year JGB Futures

  Buyer of options Seller of options
An investor purchased one unit of call options on 10- year JGB Futures (a strike price of 139JPY) at 0.70JPY The buyer paid 0.70JPY * 100JPY millionJPY / 100JPY = 700,000JPY as purchase consideration. (The buyer acquires the right to purchase one unit of the futures contract at 139JPY.) The seller receives 700,000JPY as sales proceeds.
  • Deposit　Trading Margin
When the buyer exercises his/her/its option when the futures price is 140JPY The purchase of the futures contract at 139JPY is effected. (Since the futures contract priced at 140JPY can be acquired at 139JPY, the buyer can earn the difference of 1JPY * 100 million JPY / 100JPY = 1 million JPY. By deducting a purchase consideration of 700,000JPY from the amount mentioned above, the buyer earns a profit of 300,000JPY at this stage.) The sale of the futures contract at 139JPY is effected. (The seller incurs a loss of 300,000JPY incurs at this stage.)
When the buyer exercises his/her/its option when the futures price is 139.40JPY The purchase of the futures contract at 139JPY is effected. (With gains of 400,000JPY partially offsetting purchase consideration of 700,000JPY, the buyer incurs a loss of 300,000JPY at this stage.) The sale of the futures contract at 139JPY is effected. (The seller earns a profit of 300,000JPY at this stage.)
When the futures price reaches 138JPY By abandoning the options, the loss is limited to 700,000JPY. Premiums of 700,000JPY received become profits as the buyer of the options abandons his/her/its options.
(note)
  • ･When trading in a futures contract is effected, investors are required to deposit Margin for the contract.
  • ･When trading in a a futures contract is effected, the final profits or losses will be determined when the contract is settled.
 

b. Example of Put Options on 10-year JGB Futures

  Buyer of options Seller of options
An investor purchases one unit of put options on 10-year JGB Futures (a strike price of 139JPY) at 0.70JPY The buyer pays 0.70JPY * 100 million JPY/ 100JPY = 700,000JPY as purchase consideration. (The buyer acquires the right to sell one unit of the futures contract at 139JPY.) The seller receives 700,000JPY as sales proceeds.
  • Deposit trading margin
When the futures price reaches 140JPY By abandoning the options right, the loss is limited to 700,000JPY. Premiums of 700,000JPY received become profits as the buyer of the options abandons his/her options.
When the buyer exercises his/her/its options when the futures price is 138.90JPY The sale of the futures contract at 139JPY is effected. (With gains of 100,000JPY partially offsetting purchase consideration of 700,000JPY, the buyer incurs a loss of 600,000JPY at this stage.) The purchase of the futures contract at 139JPY is established. (The seller earns a profit of 600,000JPY at this stage.)
When the buyer exercises his/her/its options when the futures price is 138JPY The sale of the futures contract at 139JPY is effected. (Since the futures contract priced at 138JPY can be acquired at 139JPY, the buyer can earn the difference of 1JPY * 100 million JPY / 100JPY = 1 million JPY. Deducting purchase consideration of 700,000JPY from the amount above, the buyer earns a profit of 300,000JPY at this stage.) The purchase of the futures contract at 139JPY is established. (The seller incurs a loss of 300,000JPY at this stage.)
(note)
  • ･When trading in a futures contract is effected, investors are required to deposit Margin for the contract.
  • ･When trading in a futures contract is effected, the final profits or losses will be determined when the contract is settled.