Hi,Does anyone have convexity bias figures for Euronext.LIFFE Short Sterling futures for 2-year and 5-year. I've got them as 0.02 and 0.14 but am looking for verification.Thanks

C'mon guys, dig deep for the newbie. It's on Bloomy somewhere (STIR <Go> ?).

June '08 bias = 109bpsMarch '11 bias = 442bps (march is last on the board)

Hi, Thanks for taking the time to reply. I'm not sure that those figures make much sense though - 108 bps on the M6 Sterling contract would be 108 ticks or 1.08% off implied rates which are impossibilities.As a guide, the more volatile CME eurodollar has a 2-year convexitiy bias of approx 3 ticks (3 bps).Once again though, thanks for the response.

My bad...Clearly, I'm not a swaps guy! This should be right:Jun'06 = 1.10bpsMar'11 = 4.47bps

as an aside i dont know about sterling but in USD 2y swaps tend to consistently trade with a lower convexity bias than calculationns suggest... for example the 2y theoretical adjustment in USD is usually around 1.25 bps but swaps in the market usually trade 0.75 under the strip....

for example the 2y theoretical adjustment in USD is usually around 1.25 bps but swaps in the market usually trade 0.75 under the stripwhy do you think this happens?

Not sure - I wonder if its to do with the compounding conventions used in the zero curve for forwards and those used for swaps. Just guessing tho'.

well in order to "arb" this tendency, you would have to receive fixed on a swap, sell the interpolated amount of eurodollar futures, and then trade the "gamma" of this convexity position (just like delta hedging an option)...first, given the short maturity and small convexity difference, you would need to put on huge size in order to get any significant profit. secondly, there are other "noise" issues which could eat into the arb such as ed future interpolation, reset risk, etc....

not sure why u think reset risk or futures interpolation would be problematic: one would mostly use a 1yr red June IMM swap to achieve this. One US bank has already done about 50 yards of receiving on that swap in the past month and a half, possibly to achieve the same.there's more to it, though. huge transaction costs on the operations side and sometimes agency issues as well (in some banks part of the negative gamma because of a long futures v/s swaps position is experienced in the ops department and does not filter to the dealer's books!)

the liquidity of IMM swaps is a fraction of that of spot swaps, so doing IMM trades would likely be implausible in any sore of size....moreover, imm swaps tend to trade much closer to theoretical convexity adjustment, as this is the main factor that counterparties will focus on w/r/t the trade....though you do bring up a valid point about transaction costs....as far as the the gamma position not filtering through the risk, i cannot imagine that this is possible.... if the dealer in question marks their books to market each day (as i am certain all do), the gamma effect will automatically appear when the book is revalued, as the swap will be revalued with convexity and the ed futures will not....

also 50 billion of 2y swaps is not a huge amount on an active day.....

as far as the the gamma position not filtering through the risk, i cannot imagine that this is possibleHere, I'm not talking about the gamma pos on the swap (which always filters into the swap dealer's p&l), but rather the fact that when futures rally, the ops group invests the gain on a long futures position at a lower rate and vice versa (which is done once a day rather than continuously). And the bid-offer on this is generally large (in terms of bps).moreover, imm swaps tend to trade much closer to theoretical convexity adjustment, as this is the main factor that counterparties will focus on w/r/t the tradethat is why dealers interested in taking a view on the convexity adjustment marks used by the market use IMM swaps rather than spot swaps (in which case you have nasty fra-switch risk in big amounts that have to be hedged against FOMC jump risk, etcthe liquidity of IMM swaps is a fraction of that of spot swapsYou seem to be knowledgable of current market trends, so I assume you're currently trading dollar swaps (among other things, I hope). If so, I'm a little surprised by this statement.Nowadays, a very popular trade through bookies (done net by dealers, I must assume) is to trade IMM swaps v/s futures unchanged for the day. As one would imagine, these when crossed, deal in huge size.also 50 billion of 2y swaps is not a huge amount on an active dayI'm talking about one dealer. 50 yards was very conservative as I can only go by how much I've traded with him and when I hear him trading with others. But still, if you think 50 yards of 2yr swaps by one single dealer on one day ain't a big amount, not sure what channels you use to trade. Because, I get flow info from all leading brokers daily and have rarely heard one dealer doing that much in a day (the two traders I know who dealt that size have both blown up in the past year).