[Derivative ABC] What Is Treasury Futures Trading?... How Is It Different from Treasury Bonds?

[Asia Economy Reporter Ji-hwan Park] Korean Treasury-Bond futures refer to futures products on South Korean government bonds traded in the derivatives market of the Korea Exchange.

Korean Treasury-Bond futures are divided into 3-year, 5-year, and 10-year products based on their remaining maturity. Looking at the history of these products, the 3-year maturity Treasury-Bond futures have the longest history, having been listed and traded on the Korea Futures Exchange since 1999.

The 3-year Treasury-Bond futures target government bonds with a remaining maturity of 3 years as of the settlement date. Here, general investors often wonder how Treasury-Bond futures differ from the actual government bonds.

Government bonds, as the name suggests, are bonds issued by the government. The bonds themselves are the investment target. They are traded in on-exchange markets such as the KOSPI Market Division or in over-the-counter markets through securities companies. Since government bonds are guaranteed by the state, there is no risk of default as long as the country does not collapse, which makes their prices higher compared to other bonds.

Korean Treasury-Bond futures involve trading based on the expected future price fluctuations of government bonds. At maturity, there is no actual delivery or settlement of the government bonds; only the price difference is settled in cash. Unlike regular bonds, futures do not pay interest or principal at maturity. Investors simply speculate whether the current bond price will rise or fall by the future maturity date.

There are also overseas products in Treasury-Bond futures trading. A representative example is U.S. Treasury futures trading, which targets U.S. Treasury bonds with maturities ranging from 15 to 25 years.