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kfcnhl
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Posts: 9
Joined: July 28th, 2009, 3:56 pm

Newbie questions on bond futures

November 27th, 2017, 2:47 pm

Our trader just bought some CNZ7s and sold some CNH8s.
CNZ7 - dec 17 10 year gov bond
CNH7 - mar 18 10 year gov bond

Could someone help to explain the trade in terms of:
1. what is the bet?
2. what are the risks?

If there are any papers I should read, please help to point me in the right direction.

Thanks a lot,
KFC
 
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bearish
Posts: 5186
Joined: February 3rd, 2011, 2:19 pm

Re: Newbie questions on bond futures

November 28th, 2017, 3:21 am

Viewed through traditional futures glasses, he promised to park a bunch of bonds with the counterparty from Dec to Mar for a fee. So he has locked in financing for the bonds for three months, i.e. entered into a synthetic forward term repo. Aaron Brown describes a lot of these sorts of trades (among many other things) in his book Red Blooded Risk, which is well worth reading. For another example, if you buy WTI and sell Brent crude futures, you essentially contract for a synthetic trans-Atlantic oil shipment.
 
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Martinghoul
Posts: 188
Joined: July 18th, 2006, 5:49 am

Re: Newbie questions on bond futures

November 28th, 2017, 10:30 am

Your trader just did the roll, that's all.  They might been short CNZ7 to start with or maybe they're doing this as a punt.  Trading the roll is a bit of an art mixed with science.  I am pretty sure there's enough written on the subject that you can at least acquaint yourself with the mechanics.  

One thing I would note is that the basics of rolls are derived from the nature of the common bond futures contract.  You should read Burghardt et al's seminal text "Treasury Bond Basis" to get a full understanding of these things.