Here, the spot and futures prices of government bonds are net prices, and the conversion coefficient is the conversion coefficient of cash bonds on a specific delivery date. At the same time, there are dozens of treasury bonds traded in the market, and different treasury bonds have different conversion coefficients; Even for the same national debt, different futures contracts have different conversion coefficients.
Case 1
Assuming that the treasury bond futures contract is delivered in March 2020, the price is 100 yuan, the spot price of a treasury bond is 105 yuan, and the conversion coefficient in March 2020 is 1.02, then the basis difference of treasury bonds is105-100×.
The so-called treasury bond basis transaction is a trading method with basis as the object. The main trading methods of basis are long and short:
If you think that the basis will expand, you will perform the operation of long-term basis, that is, buy spot government bonds and sell government bond futures at the same time; If you think the basis will be reduced, short the basis, that is, sell spot government bonds and buy government bond futures.
It can be seen that the long and short direction of basis trading is consistent with the long and short direction of its spot position.
The profit and loss of bulls and bears in basis trading are completely different. This is because the trading mode of options is implied in the basis trading. Long trading is equivalent to holding long options, with limited losses and unlimited profits, while short trading is equivalent to holding short options, with limited gains and unlimited losses. Why there are implicit options in basis trading and what role this implicit option will play in basis trading will be expounded in the following chapters.
At the same time, there are many treasury bonds in the market for trading, and choosing different spot for basis trading will produce different effects:
(1) If CTD voucher is used, you can participate in delivery. For multi-basis, when the basis is reduced, they can avoid the loss from expanding through delivery, and when the basis is enlarged, they can close their positions in advance and make profits. In theory, CTD is the most suitable spot for delivery, which will be popular in the market, so there are few trading opportunities.
(2) If you use non-CTD deliverable vouchers, you can also participate in delivery. For long basis, when the basis is reduced, the loss can be avoided by delivery; Although the profit is lower than CTD, the trading opportunities increase because of the expansion of the selection range.
(3) Those who use non-deliverable bonds cannot participate in delivery. For long spread, when the basis is reduced, it is impossible to avoid the expansion of losses through delivery, which has certain risks. However, there are more trading opportunities because of the wider choice of spot.
It can be seen that with the expansion of the choice of spot bonds, the profit of basis trading will gradually decrease, but the trading opportunities will increase, and traders need to choose between trading opportunities and yields.
Basis trading is to operate the spot and futures of government bonds at the same time, and their positions are opposite, so basis trading is actually an arbitrage transaction.
It should be noted that in the basis definition, the futures price must be multiplied by a conversion factor (hereinafter referred to as CF), so the quantity ratio of futures to spot is not 1: 1, but CF: 1. This is an important difference between basis trading and ordinary arbitrage trading, and it is also an important factor affecting the performance of basis trading.
The face value of the treasury bond futures contract is 6,543,800 yuan. For the convenience of description, in the following chapters, we refer to the spot of national debt with a face value of 6,543,800 yuan as spot.
Case 2
Still taking the data in the case 1 as an example, the conversion coefficient of spot is 1.02, so the quantity ratio of spot and futures is 1: 1.02, and the nearest integer ratio is 50: 5 1, that is, 50 are needed. The futures contract price is 1 ten thousand yuan, and the spot price is10.05 million yuan, so the total value of futures contract is 51×100 = 5100 (ten thousand yuan), and the total value of spot contract is 50 ×/kloc-0.
In fact, there will be many decimal places in the conversion coefficient, so it is difficult to allocate the positions of spot futures strictly in proportion. At this time, it is necessary to choose between the accuracy of the transaction and the amount of funds.
Case 3
If the conversion factor is 1.022, we strictly follow 1: 1.022, and we need 500 spot and 51/futures. If the conversion factor is rounded to 1.02, only 50 spot and 5 1 futures are needed. If 1.022 is approximated as 1.025, only 40 spot and 4 1 futures are needed. If it is more extreme, approximately 1.022 to 1, then the spot and futures quantities each need 1 lot for basis trading.
It can be seen that approximate treatment of conversion factors can greatly reduce the demand for funds. Accordingly, due to the incomplete matching of spot futures, there will be certain risk exposure in the transaction. In case 3, if the conversion coefficient is approximately 1.025, spot futures positions are allocated according to this ratio, which is equivalent to two transactions, one of which is a basis transaction with a ratio of 1: 1.022, and the other is a unilateral futures transaction with a quantity of 0.003 (see figure 1)
Figure 1 decomposition approximate scale.
Under some special market conditions, part of the basis trading may be profitable, while the unilateral trading of futures will lose money. Once the loss is too large, it will affect the performance of basis trading.
The greater the difference between the approximate value of the conversion coefficient and the actual value, the greater the risk exposure and the greater the possibility of the basis transaction failure. Therefore, traders need to weigh the accuracy of the transaction and the amount of funds, and choose the best ratio according to their own situation.
It is not difficult to see that there is a great demand for funds to improve the accuracy of basis trading and reduce risks, and the most important financial pressure comes from the spot part. In order to alleviate the financial pressure of the spot part, we can enlarge the spot position of national debt through bond repurchase, realize leverage operation and improve the efficiency of capital use.
skill
The so-called repurchase transaction refers to the transaction mode in which the bondholder agrees with the buyer to repurchase the bonds at a pre-agreed price on a certain maturity date while selling the bonds and integrating the funds. Bondholders can obtain funds through repurchase transactions, continue to buy bonds, and then obtain funds through repurchase transactions again, so that the spot position can be enlarged.
There are still many details to be paid attention to in the repurchase transaction of national debt, such as the underlying bond, conversion rate, interplanting multiple and so on. Here, let's give a simple example to illustrate how the repurchase transaction is leveraged:
Case 4
Assume that the bondholder originally held 6,543,800 yuan of treasury bonds in cash, and carried out a circular repurchase transaction: the first financing obtained 800,000 yuan in cash and bought treasury bonds with a market value of 800,000 yuan; In the second repurchase transaction, 800,000 yuan of government bonds can raise 640,000 yuan in cash to buy 640,000 yuan of government bonds with market value; The third repurchase of government bonds with a market value of 600,000 yuan raised 480,000 yuan and purchased 480,000 yuan of government bonds. * * * Three repurchases raised 6,543,800 yuan+0,920 yuan, all of which were used to purchase government bonds. Adding the original national debt with a market value of 6,543.8+0,000 yuan, * * * calculates 2,920,000 yuan of national debt, which is equivalent to enlarging the spot of national debt by 654.38+0.92 times, which has a leverage effect.
Buy-back transactions can get larger spot positions with less money, but the original spot of government bonds needs to be pledged when buying back, so traders don't really hold the spot and can't deliver. Can be used for delivery, only the last purchase spot.
If you can't participate in delivery, once the basis moves in the opposite direction to the operation, traders can't control the risk through delivery. That is to say:
(1) bond repurchase can improve the utilization rate of funds, but it has certain risks because it cannot participate in delivery.
(2) If the repurchase operation is not carried out, the loss can be avoided through delivery, but there is more demand for funds.
(3) Therefore, traders need to strike a balance between capital pressure and trading risk.
To sum up, in the basis of trading, traders have a variety of different choices in trading details:
In the direction of (1) basis trading, long trading or short trading will produce different profit and loss curves.
(2) In the choice of spot, the use of deliverable bonds or non-deliverable bonds will have different risks and trading opportunities.
(3) In spot operation, whether there is repurchase operation or not, the capital demand, trading profit and loss and trading risk will be different.