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Bond Futures

A futures contract which is entered into by an investor willing to buy or sell a specified bond for a predetermined delivery price at a specified date in the future. Bond futures can be used to hedge against the risk associated with changes in bond prices over the course of a few months.

For example, a bondholder can hedge his bond portfolio against a fall in the value of the underlying bonds by selling bond futures (short bond futures). If interest rates in the bond market rise (and also bond yields), bond prices will fall, and the loss in the value of this portfolio will be offset by gains on the bond futures (i.e., the short bond futures).


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