Options on JGB Futures

Functions and Applications

Update : Jun. 06, 2011

1) 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.

2) 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.

3) 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.

4) 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.