Bond Forward (Reference Data)

ORE defines the product as follows:

A Forward Bond (or Bond Forward) is a contract that establishes an agreement to buy or sell (determined by LongInForward) an underlying bond at a future point in time (the ForwardMaturityDate) at an agreed price (the settlement Amount).

Source: ORE User Guide, Products catalogue, bondForward_refdata.tex.

ORE describes the T-Lock and J-Lock forms as follows:

A T-Lock is a Forward Bond with a US Treasury Bond as underlying, whereas a J-Lock is a Forward Bond with a Japanese Government Bond as underlying. T-Locks can be specified in terms of a lock-in yield rather then a settlement amount. The cash settlement amount is given by (bond yield at maturity - lock rate) x DV01 in this case.

Source: ORE User Guide, Products catalogue, bondForward_refdata.tex.

A bond forward locks the price of a bond today for delivery later. The buyer pays the agreed amount at maturity and receives the bond, or the cash difference. The T-Lock is the same trade on a Treasury bond, with the price expressed as a yield. It lets a mortgage desk lock the yield it will pay on a future delivery.

A Forward Bond is set up using a ForwardBondData block and the trade type is ForwardBond. The block has four parts. The BondData block specifies the underlying bond by SecurityId and BondNotional. The SecurityId is typically the ISIN of the underlying bond with the ISIN: prefix. The optional CreditRisk flag decides whether credit risk shows on the product. When it is false, the product class is RatesFX instead of Credit and there are no credit sensitivities. The flag has no effect when the bond reference carries no CreditCurveId, which is typical for highly rated government bonds. The SettlementData block holds the settlement terms. ForwardMaturityDate is the maturity of the forward contract. ForwardSettlementDate is optional and names the settlement or cash payment date. Settlement takes Cash or Physical and defaults to physical, except that a trade defined by a LockRate defaults to cash. Amount is the settlement amount, or strike, transferred at maturity in return for the bond or its dirty price. It moves from the long party to the short party and cannot be negative. Exactly one of Amount and LockRate must be given. LockRate sets the payoff as (yield at forward maturity - LockRate) x DV01 for a long position; it is expressed in decimal form. dv01 can override the DV01 derived from the bond price. LockRateDayCounter is optional and defaults to A360. SettlementDirty decides whether the amount reflects a clean or dirty price; the dirty amount is always paid at maturity, and accruals are added internally when the flag is false. The PremiumData block is optional and holds a premium Date and Amount. The LongInForward flag decides whether the contract is long or short.

A physically settled forward pays the agreed amount at maturity and receives the bond. A cash-settled forward pays the difference between the dirty bond price and the amount. The T-Lock variant pays the difference between the bond yield at maturity and the lock rate, scaled by the DV01 of the bond. The DV01 converts the yield difference into a price difference.

• The price and yield of the underlying bond.
• The forward date and the settlement amount or lock rate.
• The interest rates that finance the position to maturity.
• The credit of the issuer, unless the trade opts out of credit risk.

The trade is a linear claim on the underlying bond, so its value moves almost one for one with the bond price. The T-Lock form is sensitive to the yield curve through both the bond yield and the DV01.

A bond forward has no coupon flows during its life. Only the premium, if any, changes hands before maturity. The value converges to the difference between the bond price and the agreed amount as maturity approaches. At maturity the trade settles physically or in cash.

A bond forward locks a purchase or sale price without funding the bond today. It suits a customer who must deliver a bond at a known future date, or who wants a leveraged view on a bond. The T-Lock form locks a yield, which is how mortgage pipelines hedge. In ORE Studio a customer books forward bonds to value them and run sensitivities on the ORE engine.

ORE's catalogue shows a long, physically settled forward bond with a premium, on a bond from reference data:

<ForwardBondData>
  <BondData>
    <SecurityId>ISIN:XS1234567890</SecurityId>
    <BondNotional>100000</BondNotional>
  </BondData>
  <SettlementData>
    <ForwardMaturityDate>20160808</ForwardMaturityDate>
    <Settlement>Physical</Settlement>
    <ForwardSettlementDate>20160810</ForwardSettlementDate>
    <Amount>1000000.00</Amount>
    <SettlementDirty>true</SettlementDirty>
  </SettlementData>
  <PremiumData>
    <Amount>1000.00</Amount>
    <Date>20160808</Date>
  </PremiumData>
  <LongInForward>true</LongInForward>
</ForwardBondData>

Source: ORE User Guide, Products catalogue, bondForward_refdata.tex, listing Forward Bond Data. The source spells the settlement value Physcial and closes the BondData element without the leading slash; both are normalised here.