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D. M. Chance An Introduction to Derivatives and Risk Management, 6th ed. Chapter 11: Advanced Futures Strategies Some people think of speculative traders as gamblers; they earn too much money and provide no economic value. But to avoid crises, markets must have liquidity suppliers who react quickly, who take contrarian positions when doing so seems imprudent, who search out unoccupied habitats and populate those habitats to provide the diversity that is necessary, and who focus on risk taking and risk management. Richard M. Bookstaber Risk Management Principles and Practices, AIMR, 1999, p. 17 Important Concepts in Chapter 11 Futures spread and arbitrage strategies Cheapest-to-deliver bond Delivery options Use of futures in market timing, alpha capture, and asset allocation Short-Term Interest Rate Futures Strategies Treasury Bill Cash and Carry/Implied Repo Cash and carry transaction means to buy asset and sell futures Repurchase agreement/repo to obtain funding Overnight vs. term repo Cost of carry pricing model: f0(t) = S0 + q Implied repo rate: Short-Term Interest Rate Futures Strategies (continued) Treasury Bill Cash and Carry/Implied Repo Rate Also equivalent to buying longer term bill and converting it to shorter term bill. Example. See Table 11.1, p. 386. Eurodollar Arbitrage Using Eurodollar futures with spot to earn an arbitrage profit. See Table 11.2, p. 388. Intermediate and Long-Term Interest Rate Futures Strategies Recall the option to deliver any T-bond with at least 15 years to maturity or first call. Adjustment to futures price using conversion factor, which is the price per $1.00 par of a 6% bond delivered on a particular expiration. Invoice price = (Settlement price on position day)/(Conversion factor) + Accrued interest Example: Delivery on March 2003 contract. Settlement price is 109 28-32 ($109,875) on position day. Intermediate and Long-Term Interest Rate Futures Strategies (continued) You plan to deliver the 7 7/8s of 2021 on March 7.