Futures Bond Basis

Dr Moorad Choudhry is Head of Treasury at KBC Financial Products in London. He is a Visiting Professor at the Department of Economics, London Metropolitan University, a Visiting Research Fellow at the ICMA Centre, University of Reading, a Senior Fellow at the Department of Mathematical Trading and Finance, Cass Business School, and a Fellow of the Securities and Investment Institute.

• Preface xiiiAbout the author xix1 Bond Futures Contracts 11.1 Introduction 21.1.1 Contract specifications 41.2 Futures pricing 111.2.1 Theoretical principle 121.2.2 Arbitrage-free futures pricing 161.3 Hedging using bond futures 211.3.1 Introduction 211.3.2 Hedging a bond portfolio 261.3.3 The margin process 311.A Conversion factor for the long gilt future 34Selected bibliography 382 The Government Bond Basis 392.1 An introduction to forward pricing 412.1.1 Introduction 412.1.2 Illustrating the forward bond basis 432.2 Forwards and futures valuation 462.2.1 Introduction 462.2.2 Forwards 472.2.3 Futures 492.2.4 Forwards and futures 502.2.5 Relationship between forward and future price 522.2.6 The forward–spot parity 542.2.7 The basis and implied repo rate 572.3 The bond basis: basic concepts 602.3.1 Introduction 602.3.2 Futures contract specifications 622.3.3 The conversion factor 672.3.4 The bond basis 752.3.5 The net basis 782.3.6 The implied repo rate 822.4 Selecting the cheapest-to-deliver bond 922.5 Trading the basis 942.5.1 The basis position 942.6 Exercises 97Selected bibliography 1003 Basis Trading and the Implied Repo Rate 1033.1 Analysing the basis 1043.1.1 No-arbitrage futures price 1053.1.2 Options embedded in bond futures contracts 1103.2 Bond delivery factors 1123.2.1 The cheapest-to-deliver 1123.2.2 Selecting delivery time 1143.2.3 Changes in CTD status 1173.A General rules of the CTD bond 1193.B A general model of the CTD bond 121Selected bibliography 1224 The Fundamentals of Basis Trading 1234.1 Rates and spread history 1244.1.1 Net basis history 1244.1.2 The implied repo rate 1284.2 Impact of the repo rate 1294.2.1 The repo rate 1304.2.2 Short bond position squeeze 1344.3 Basis trading mechanics 1364.3.1 Using the conversion factor 1374.3.2 Trading profit and loss 1384.4 Timing the basis trade using the IRR 1394.4.1 The implied repo rate (again) 1394.4.2 The IRR across futures contracts: Bloomberg illustration 143Selected bibliography 145Appendices A Repo Financing and the Concept of the ‘special’ 147A.1 Classic repo 150A.2 Basket repo: Illustration using Malaysian government bonds 151A.3 Special bonds in repo 155B Relative Value Analysis: Bond Spreads 159B.1 Swap spread and Treasury spread 161B.2 Asset–swap spread 163B.3 Z-Spread 165B.4 Cash–CDS basis 169References 173C Liffe Long Gilt Delivery History, March 1996 to June 2001 175Glossary 199List of abbreviations 227Index 229