Registered: Apr 2002
08-15-12 04:36 PM
Quote from Nym:
a) let's assume that I buy in september a future with delivery december. Let's also assume that I will sell it just before the settlement. What will I earn (or loose)? Will I earn something for holding the future for 3 months?
b) Can I implement the cash and carry strategy using options?
Martin knows alot more about this than I do... but you need to appreciate how fucking complex the fixed income world truly can be, and what some of the terms you are throwing around really mean. This rabbit hole is the deepest in the universe... with the only notable exception that I am aware of being the electricity markets.
The term "Cash and Carry" in the fixed income world generally means that you are borrowing money to buy a bond and then you proceed to sell it to a futures exchange where it is fungible. This is a common strategy that is not a 'risk-free' rate of return. This is a common trading strategy, where you borrow the money on the "repo" market while posting the bond as collateral.
The profit is basically the coupon you earned over the holding period ( your accrued interest at delivery ) less the current accrued interest.
The cost for doing the trade = ( current market price of cash bond + accrued interest ) x repo rate ( your interest charges on the loan ) x days to delivery / 360.
What you will lose on the trade is the "Basis" current market price of the cash bond less the invoiced value of that cash bond upon delivery to the futures exchange.
I had a very good basis trader here in Chicago tell me that when it comes to the meaning of the "Basis" that you have to think of futures as 'protection money' for the hedger. Think of every futures price tic change as a change as the result of variances in the coupon component of the basis and variances in the financing component of the basis.
Your change in the value of the delivery options into the futures contract is essentially your "Net Basis".
Oh, and this is assuming you are using a 'cheapest to deliver' ( CTD ) bond. The off-the-run stuff is deliverable with a conversion factor provided by the exchange - which is a deeper plunge into the rabbit hole.
So, Nym, no free money here I am afraid to report.
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