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7 votes

Why was CDS-bond basis close to zero before the financial crisis?

You and the paper are both correct. Funding was not free before the GFC, but the funding cost of both positions then was almost equal, generating almost-zero basis. Since then, holding physical bonds ...
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5 votes
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Why has cross currency basis become higher since the 2008 crisis?

When you look at EUR/USD Cross Currency basis historical chart, you will notice that it was very similar in magnitude before 2008 to what it is now: in other words, there has always been some cross-...
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  • 5,081
4 votes
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Why z-spread differs from CDS spread in 1 period example

The CDS spread costs you 11.7% in order to ensure that the holder gets the remaining 60% of principal and interest in return. In the end, the payment you are getting in default is 60%-11.7% = 48.3%. ...
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  • 709
4 votes
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FX Hedging costs when using 3m FX Fowards vs XCCY swaps for an IG Bond

To get an accurate answer you probably won't be able to get around using a proper pricer and comparing the two methods. To contrast the two approaches: FX Forwards: convert all cashflows from CCY1 to ...
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  • 850
4 votes

Cross Currency Swap - is par basis supposed to change while OIS discounting rate is changing?

So you have a USDJPY cross currency basis swap priced using: USD OIS discounting and USD Libor pojection for the USD leg USDJPY Basis curve discounting and JPY Libor projection for the JPY leg The ...
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  • 5,285
4 votes
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DV01 on LIBOR vs. SOFR basis Swaps

I will try to make a more general suggestion that doesn't depend on SOFR, EONIA, LIBOR, cross-currency basis, etc, but applies all all linear interest rates products. Sorry if I may be digressing. You ...
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3 votes

Negative Carry when Yield Curve is Downward Sloping

Repo rates will be very close to short-term treasury rates so "the yield curve is downward sloping" and "bond yield minus repo rate is negative" mean very nearly the same thing. ...
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  • 5,628
3 votes

treasury bond cash future net basis

Reasons why the net basis might trade negative from time to time : 1) if a credit crisis occurs, investors do not have the resources to invest in the basis. For example , banks are unwilling or ...
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3 votes
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Basis risk, spreads and discounting

First lets clear one thing up, 'basis' and 'spreads' are the same thing. Often this is called the 'basis spread'. This represents the difference between curves at different points in time. For ...
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  • 8,037
3 votes

Reference on Futures basis trading strategy

There are some slight inaccuracies in using term basis. You probably meant strategies which profit from carry/futures roll. There are a lot of variations of carry/roll strategies on different markets. ...
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  • 183
2 votes

Tenor basis spreads 1mv3m vs 3mv6m

I would explain it slightly differently. The data shown indicates the market price of basis swaps. The spreads shown are to be added to the 3 mo libor leg of the basis swap. For example , the 5yr ...
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2 votes
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Tenor basis spreads 1mv3m vs 3mv6m

In the presented method we have one main tenor, which is 3M in the case of USD. The Adjustment is negative if we want to adjust a tenor shorter than 3M e.g. 1M. It is positive for greater tenors like ...
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2 votes
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Convert 3M rates to 6M rates using Basis Swaps (3M vs 6M)

Let's say 1yr semiannual rate versus 6m Libor is 2.00% and 1yr basis swap is 6m libor = 3m libor + 15bp. Then , to a first approximation 1yr rate versus 3m libor is 2.00-0.15= 1.85%. More ...
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2 votes

bootstrapping a basis curve to get a forward basis curve

The results are the same as long as you use the same data and common interpolation methods. For instance 12M Libor vs fixed swaps are less liquid than 12M Libor vs 3M Libor basis swaps so one ...
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2 votes

tenor basis swap spreads and compounding

Convention for most currencies is flat compounding. This includes the most liquid G4 basis swaps: EUR 3m vs 6m, 3m vs 12m, 1m vs 3m USD 1m vs 3m, 3m vs 6m GBP 3m vs 6m, 1m vs 3m JPY 3m vs 6m, 1m vs ...
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  • 850
2 votes

How can we compute the daily drop in gross basis?

The change in the gross basis would simply be due to carry. You know the spot price of the bond. If you lock in term repo to the forward date, you will know your forward price. The difference between ...
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2 votes

Reference on Futures basis trading strategy

The Treasury Bond Basis: An in-Depth Analysis for Hedgers, Speculators, and Arbitrageurs by Galen Burghardt and Terry Belton is a good book on Treasury Futures.
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  • 5,225
1 vote

Is there any data sources for historical arbitrage basis (e.g. on-the-run/off-the-run basis)?

We’ve used data from TradeWeb before and the data quality was excellent. I believe the historical data goes back to 1998. Alternatively, a lot of bank research portals have this as well. For example, ...
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  • 10.9k
1 vote

Implied funding/repo rates from Credit Default Swaps

I recall that in 2002, when Lula won the Brazilian presidential election, and was later inaugurated, most of the market participants assumed that Brazil would default on its sovereign debt, as ...
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1 vote

Cross Currency swap - Bond Yields arbitrage

Say a US investor with 1mm USD wants to buy a 10Y Volkswagen bond in EUR priced at 100 EUR with a 5% coupon. First that investor needs to acquire EUR for purchase without exposing themselves to FX ...
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  • 8,037
1 vote

How to construct a GBP FVA curve from a USD FVA curve

There are two aspects to consider here. Aspect 1 is funding the notional of the Xccy swap and the coupons (strictly speaking this is not FVA). Aspect 2 is funding the MtM of the swap throughout the ...
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  • 5,081
1 vote

Duration of a futures contract

By dividing the duration of the CTD by its conversion factor, we arrive at a number that approximates the sensitivity of the futures price to the yield of the CTD. Recall that duration of a bond is a ...
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  • 330
1 vote

why is ADBSC currency positive?

I think it has something to do with differences in how Australian banks and EU/JP banks finance themselves. Probably you need someone who is an expert in Australian and European banking structure to ...
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  • 9,462
1 vote
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Cross Currency Swap - is par basis supposed to change while OIS discounting rate is changing?

Let me add that the USD-JPY Xccy basis is a very liquid instrument that is quoted by market makers: therefore, the Xccy Basis is not "priced" or "solved for", it is directly quoted ...
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  • 5,081
1 vote
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How can we compute the daily drop in gross basis?

As commented by ZRH, the first step is to consider what the drop in $P_{\text{bond}}$ is, since this is the only changing value in the formula for gross basis: $$b_{\text{gross}} = P_{\text{bond}}-(...
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  • 407
1 vote

How can we compute the daily drop in gross basis?

The expected change of basis over time will be equal to the change of $P_{bond}$ over time; this is because he change of $P_{futures}$ (as market estimate of delivery price) is expected to be zero (it ...
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  • 1,581
1 vote

bootstrapping a basis curve to get a forward basis curve

PnL variability and risk reliability should not be a problem if you have well designed control (knot) points and enough data. See Darbyshire: Pricing and Trading Interest Rate Derivatives. I would ...
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  • 8,037
1 vote

Basis risk, spreads and discounting

Hope that give you an overview and helps you. In the financial crisis it can be seen on the difference between IBOR spot rates and OIS rates, which we will further refer to as the IBOR-OIS spread. ...
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  • 220
1 vote

tenor basis swap spreads and compounding

This would be specified in the ISDA or term sheet. There are four alternative methods: No compounding: Meaning neither the rate nor the spread get compounded. Compounding: Meaning both the spread ...
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1 vote

Intuition behind the tenor basis spread in basis swaps

I don't endorse the belief that this is a credit concern. For banks operating a continual lending business they are less concerned with an isolated case of lending for 1M rather than 3M cause it is ...
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