If we assume net basis is 0, the bond trades above par, the bond’s yield > than the term repo rate, what is the expected pnl of being Short the ctd vs long futures?

I would have thought the expected pnl is 0. The bond will cheapen vs the future generating pnl in an amount = to the gross basis which = pure carry (coupon income - repo cost).

My confusion is two fold:

  1. what about the pull to par income from being short, is this taken into account above.

  2. The bond yield > repo rate and hence isn’t real carry actually negative and hence the short basis position negative expected pnl?

Please could someone explain intuitively and mathematically why real carry = bond yield - repo rate and why this is equivalent to coupon income - repo cost + pull to par? I am unsure why the former includes pull to par?



Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Browse other questions tagged or ask your own question.