I have tried to calculate the theoretical futures price for 2 year Treasuries September contract but the resulting figure is 11.5/32nds higher than the actual quoted futures price (based on Monday's settlement prices- 7/12/10). Does anyone know why this could be? I used the figures below

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Settlement price of 2 yr Treasury futures = 109 12-5/32nds

Settlement price of Cheapest to deliver = 99 31/32nds

Coupon rate (paid semi-annually) = 0.625%

CTD Issued on 30/6/10, days of accrued interest = 12 days

Days until next Coupon = 171 days

Days until expiry (september 30th) = 80days

(I have assumed the last delivery day,correct?)

Conversion Factor = 0.9119

Risk Free Rate = 1.14375%

(I have used the 1 Year US LIBOR rate, is this correct?

The 12 month treasury is trading at a yield of 0.28)

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Accrued Int. = 12/183 x 0.625/2 = 0.0204918

Dirty Price = 99.989242

Since no coupon is issued during the life of the futures contract, I have excluded it:

Cash Futures Price =(Dirty Price - PV of Coupon) x exp(days until expiry/days in year x r)

= (99.989242 - 0) x exp(80/183 x 1.14375%) = 100.24021

Quoted Futures Price SHOULD BE = (cash futures price - accrued int at delivery)/Conversion Factor

= (100.24021 - (92/183)x0.625/2)/0.9119 = 109.7522869 ~ 109 24/32

Thus the theoretical futures price I have calculated is 11.5/32nds higher than the quoted settlement price (109 12.5/32nds).

Any ideas why this is? I thought it may be delivery options impacting on the price somehow but from the research I’ve done, it is highly unlikely that the value of the timing or quality option can explain all of the discrepancy. I suspect I am using the wrong rate, perhaps a repo rate should be used or perhaps there are other borrowing costs to take into account. I have included an excel worksheet for clarity.

Any help would be great.

Thanks

Brackers27