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7

Trading bond futures calendar spread is actually a very involved exercise, with many moving parts. But first things first, recall that bond futures price is approximately: $$ F = \text{spot price} - \text{carry} - \text{delivery option value (DOV)} \pm \text{rich/cheap}.$$ So calendar spreads represent the differences in spot prices, in carries, in delivery ...


7

If I look at the market I think this is mainly driven by the very nature of the long end investors of the swap curve. Compared to govi curves the swap curves provides a much better liquidity in longer tenors. Although we have seen a trend of bringing longer dated bonds to the market by government, too. Austria and Belgium are just two examples of these and ...


6

Pipeline constraints have resulted in a build up of stock in Texas. The high supply and constraints in exporting result in a spread between WTI and Brent. Determining an upper bound on this spread is nontrivial. One could look at alternatives to the pipelines (like rail contracts). However caution is needed in determining bounds as can be seen in Canada. ...


6

There are quite few factors that lead to the WTI vs. Brent Crude spread. Firstly in oil trading there are many different types of crude oil grades traded around the world. However, the most popular traded crude oil grades are Brent Crude and West Texas Intermediate (WTI). To understand the differences one first needs to understand some terminology. ...


5

Tough to answer specifically because I don't know what bonds you're looking at, but my guess is it has less to do with the spread-building blocks and more to do with the base curve. G spread is based off the interpolated government bond curve, and Z spread is off the Swap curve, if you mouse over on YAS it will show you the base curve. Since right now the ...


5

When trading options it is most useful to think in terms of implied volatilities, rather than option prices. For vanilla options, there is a one-to-one relationship between implied volatility and price, and the Black-Scholes formula gives the conversion between the two. Since price and implied volatility are interchangeable, you can convert both the bid and ...


5

From the link in your OP, the article is talking about buying one stock versus shorting the other. The distance pair trading system they are describing always plays the distance to converge. It just depends on which stock price has appreciated more. For example, if "stock 1" has moved up excessively compared to "stock 2", you would short "stock 1" and buy ...


5

There is usually always at least 1-tick spread. I used to trade Bund and Treasury futures: For example there could be 500 bids for Bund futures at price 173.11, 800 at price 173.10, whilst there are 250 offers at 173.11 and 700 at 173.12. The 250 buy and sell orders at 173.11 clear immediately, then there would be 250 bids left (out of the original 500) at ...


4

This is known as a 'crossed' book, the exchange will attempt to uncross the book at the price at which the maximum amount of volume can trade. In your example at the price of 42 there's only 3533 amount of buying quantity, and there are more than enough sellers to cover this. At a price of 40, there's now 3533+425 buying quantity willing to trade, and still ...


4

These total return swaps are basically funding trades. The seller of total return is putting the risk on their balance sheet. In order to pay the total return to the buyer of total return, the seller would need to hedge their risk by buying the risk of the asset. If effect, the total return seller is lending the total return buyer the funds to gain the ...


4

International banks will pass their trading from one centre to the next, so London hands over to NY, which hands over to Tokyo etc. When a centre takes the reins, they may not want to keep the same position as the previous one; perhaps London was happy being long Euro but NY wants to shift that to be long Yen, or they can't maintain the tight spreads around ...


4

Im interested in this topic myself. I haven't found anything of a good standard yet. However, there are some pamphlets from CME that could be useful as an initial exploration. I will keep looking and improving this answer. Overview of Inter-Commodity Spreads for Interest Rate Products. CME Group Yield Curve Spread Trades: Opportunities & Applications. ...


4

first keep in mind how spread is constructed, say it's $y - \beta x$, $y$ being asset $A$'s price and $x$ being that of asset $B$. Then long the spread is when $A$ is under-performing, because our current spread is smaller than "fair value". Short the spread is when $A$ is over-performing. we always short the overperformer and long the underperformer.


4

The ATM is an outright position (long 50 delta put and 50 delta call) so the main exposure is vega. It is the riskiest of the three, and demands a higher bid-offer spread from market makers to compensate them for the additional risk. The RR is a spread position (long 25 delta call, short 25 delta put) with zero vega, the main exposure is skew. Because the ...


4

Consider this schematic of the bid-ask spread. Now think about a trade happening somewhere on the horizontal line. When would you say it's inside or outside? How can a trade be in the outside area?


4

This is incorrect. There is always a bid/ask spread in futures markets. Futures are different from equities in that there is only one market that can trade them. That guarantees that there is one central location with one book that is always unlocked (and uncrossed).


4

Lots of market participants - yes. It is the ultimate hedge and/or place to express your broad market views. While RTY may be a broader market index, in practice the 500 is probably a better proxy due to liquidity in the underlying names vs the lesser liquidity in the additional 1,500 names in RTY. Virtually every return benchmark is measured vs the ...


4

This post is more related to EM markets, rather than developed markets (so could add some additional examples, to the already good DM examples given by @math above): (i) In some countries (for example CZK prior to 2019), the Ministry of Finance preferred to issue shorter-dated bonds (up to 5 years), and there was less issuance of longer-dated bonds. As a ...


4

Assume today is $t$, and the 1st coupon pays at time $T_1$, the 2nd one at $T_2$, etc. Then your term structure of spot rates would be $R_1 = R(T_1) = f(t,T_1)$ for the 1st maturity, and $R_2 = R(T_2)$ for the 2nd maturity, and so on... Note that by no arbitrage $1+R_2 = (1+f(t,T_1)) (1+ f(T_1,T_2))$. Here I denote by $f(x, y)$ today's value of a forward ...


4

OK, here is a simplified demonstration: Before we consider swaps, let us consider very simple bonds. Suppose that you have a choice of two zero-coupon bonds. A riskless one costs 95 and is certain to pay 100 in 1 year. A risky one costs 90, is expected to also pay 100 in 1 year, but with some probability $p$ will default and only pay some $R<100$ on the ...


3

this is how i would explain your approximation. First start with notation: Define $K_{atm}$ to be the atm strike. Define $\Delta K := K2 - K1$ where $K2 > K_{atm} > K1$. This corresponds to $\Delta K = $$StrD$ in your notation. Now assume a black scholes world, within this world we can approximate the Call and Put price of an atm option with: $C_{atm}...


3

There is no such thing as a "proper" interpolation of CDS spreads. The only criterium your interpolation must obey is the absence of arbitrage. Note that, assuming that $spread(3M) < spread(6M)$, $spread(4M)$ can take any value between $spread(3M)$ and $spread(6M)$ without creating an arbitrage opportunity (actually it can be even slightly less than $...


3

It depends on the exact structure. E.g., a butterfly can be bought or sold and every market participant understands which individual options are bought or sold given knowledge of the agreed spot level and distance of the wing from spot in regards to agreed strikes. Please note that a butterfly can be structured as a combination of calls but also through ...


3

You should check this answer: How to interpret the 'price' of a CDS? It explains the relation between spread and upfront. In your particular case you might consider using a simple model mentioned at the end of that answer: A simple model for the value of a short protection CDS can be found if you write V = (C-S) x RPV01 where RPV01 = (1−exp(−gT))/g ...


3

I have upvoted Chris Taylor's answer, which has the best approach, particularly for near-the-money strikes. However, for illiquid options and far-out-of-the-money and far-in-the-money strikes, you will often find that bid prices are below intrinsic value, i.e. smaller than even Black-Scholes gives even with $\sigma=0.0$. With no volatility here, it is of ...


3

22 GMT is 5pm nyc. Thats the time when all the ECNs and liquidity providers stop operation to be restated at 5.30 nyc time again. That's why you see such spreads. Probably starts to widening at 4.30pm since most liquidity providers starts to unload any remaining inventory so they can close the day flat.


3

That is the concept of Cointegration Regressing two non-stationary variables results in spurious regression. However, if these two variables are cointegrated, spurious regression no longer arises. As stated on p. 120, We call these resulting betas a cointegrating vector. Cointegration is a statistical property of time series, mainly proposed by Engle/...


3

DV01 is defined as $$ \text{DV01} = -\frac{dP}{dy}, $$ so technically you could run a regression of futures price changes vs (CTD) yield changes. The resulting DV01 is known as empirical DV01. In the context of trading bond futures, shorter-term horizons such as 3m and 6m are typically used. The chart below shows the actual TY/WN hedge ratio and an ...


3

This does not imply overestimation bias. We expect a negative autocorrelation in high- and ultra-high-frequency (every trade) data due to bid-ask bounce. Bounce occurs when buy and sell orders trading at the offer and bid are interspersed; that yields what seems to be returns even when the bid, ask, and midpoint do not change. The Roll (1984) model examines ...


3

Yes that’s pretty simple : for the purposes of defining the swap spread, we assume that the libor leg of the swap is at libor flat.


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