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- Product code: 17085
- ISBN: 0954544714,
ISBN13: 9780954544713,
200 pages, paperback
Published by YieldCurve.publishing on 2003
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Description of The Futures Bond Basis |
Basis trading, also known as cash and carry trading, refers to the activity of simultaneously trading cash bonds and the related bond futures contract.
The basis of a futures contract is the difference between the spot price of an asset and its price for future delivery as implied by the price of a futures contract written on the asset. Futures contracts are exchange-traded standardised instruments, so they are a form what is termed a forward instrument, a contract that describes the forward delivery of an asset at a price agreed today. The simultaneous trading of futures contracts written on government bonds and the bonds themselves, basis trading, is an important part of the government bond markets, and in this book we review the essential elements of this type of trading. We begin with basic concepts of forward pricing, before looking at the determinants of the basis, hedging using bond futures, trading the basis and an introduction to basis trading strategy. We also look at the concept of the cheapest-to-deliver bond, and the two ways in which this is measured, the net basis and the implied repo rate.
The book is illustrated with in-depth practical examples from the United Kingdom gilt market. It is written in accessible style and of vital use to anyone with an interest or involvement in the government bond futures market.
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Contents of The Futures Bond Basis |
1. The Government Bond Basis
1.1 An introduction to forward pricing
1.1.1 Introduction
1.1.2 Illustrating the forward bond basis
1.2 Forwards and futures valuation
1.2.1 Introduction
1.2.2 Forwards
1.2.3 Futures
1.2.4 Forwards and futures
1.2.5 Relationship between forward and future price
1.2.6 The forward-spot parity
1.2.7 The basis and implied repo rate
1.3 The bond basis: basic concepts
1.3.1 Introduction
1.3.2 Futures contract specifications
1.3.3 The conversion factor
1.3.4 The bond basis
1.3.5 The net basis
1.3.6 The implied repo rate
1.4 Selecting the cheapest-to-deliver bond
1.5 Trading the basis
1.5.1 The basis position
Appendices
Appendix 1.1: The LIFFE long gilt conversion factor
Selected bibliography and references
2. Basis Trading and the Implied Repo Rate
2.1 Analysing the basis
2.1.1 No-arbitrage futures price
2.1.2 Options embedded in bond futures contracts
2.2 Bond delivery factors
2.2.1 The cheapest-to-deliver
2.2.2 Selecting delivery time
2.2.3 Changes in CTD status
Appendices
Appendix 2.1: General rules of the CTD bond
Appendix 2.2: A general model of the CTD bond
Selected bibliography and references
3. The Fundamentals of Basis Trading
3.1 Rates and spread history
3.1.1 Net basis history
3.1.2 The implied repo rate
3.2 Impact of the repo rate
3.2.1 The repo rate
3.2.2 Short bond position squeeze
3.3 Basis trading mechanics
3.3.1 Using the conversion factor
3.3.2 Trading profit and loss
3.4 Timing the basis trade using the implied repo rate
3.4.1 The implied repo rate (again)
3.4.2 The implied repo rate across futures contracts:
Bloomberg illustration
Appendix
Glossary
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