Published On: Fri, May 22nd, 2009

Which Future Has The Biggest Tick Size?

The 10 Year Japanese Government Bond (JGB) Future boasts the largest tick size of any future in the world. At 10,000 yen per tick (approximately 100 USD) million dollar trading errors aren’t unheard of. 1 futures contract trades in units of 100million yen face value with a tick size of 1 basis point putting this contract in a league of its own.

The underlying instrument for this futures contract is as you might have guessed is a 10 year Japanese Government bond with a 6% coupon. Expiration of this contract is for physical delivery and must comprise of an Interest Bearing (Book Entry bond) of no less than 7 years duration and no more than 11 years to maturity.

This future trades on the Tokyo Stock Exchange and has 3 trading sessions – the morning session from 9am to 11am, the afternoon session from 12:30pm to 3 pm and the evening session or T+1 session from 3:30pm to 6:00pm. Basis and block trading continue on for 20 minutes after the end of the regular trading session.

The JGB contract trades the first 3 months in the March quarterly cycle (March, June, September, December) with contracts expiring on the 7th business day before the 20th day of each month which is the Final Settlement day.

The contract has been trading since 1985 but I have included a volume graph going back to 1991 when the options on the JGB futures began to trade. I realize Open Interest would be more interesting but that data wasn’t available. The chart shows the JGB futures greatest turnover to be back in 1993 and more recently at the top of our most current economic bubble in 2007. The JGB faired well during the 1997 Asia economic crisis but turnover fell to almost 1/3 its previous high during the period between the September 11 terrorist attacks and the second Iraq war. The 2009 data is extrapolated from the monthly data below which shows monthly volume of the JGB future and options contracts since August 2008. Volumes have dropped markedly and are approaching the levels seen during the Iraq war. Not being qualified to give my opinion on Japan’s economy many can be found in the mainstream media.

As mentioned, there is an option on the Japanese Government Bond Future which grants the buyer the right to buy or sell 1 JGB Futures contract. The tick size of the option is the same as its underlying future (0.01 or 10,000 yen per tick). The option contracts trade the closest 2 months in the MJSD cycle plus up to 2 serial months. So the June future would underlie the April, May and June options contracts. These options are American style exercise and all in-the-money options are automatically exercised on the expiration day which is also the last trading day. The last trading day for JGB options is the last business day preceding the contract month so June options expire May 29th for example. Participants must notify the Tokyo Stock Exchange by 4:30pm with any exercise instructions through its CORES-FOP system. Holders of 1000 futures contracts or 1000 options contracts of the same side (i.e. 500 long calls and 500 short puts with the same strike and month) must also be reported to the exchange including Full name and address of the entity.

The TSE uses Black Scholes to determine settlement price and all option trades are settled T+1. The TSE also uses SPAN margining when calculating member margin requirements.

The Japanese financial industry is certainly the biggest in Asia and while it has had a hard time in recent years the JGB future stands as the premier interest rate future in the zone. Do you have any experience trading this contract or would you like some further information?

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  1. Dan Byrnes says:

    Traded it for years. It you to see some great long term trends back in the day. Shorted it a few days back. Traded it on Simex until TSE allowed giveups. They were late in the give up game. There alos used to be a London based contract. There is a 1/10 size contract on Simex as well.

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