Of course, the holders of neutral products are not unfamiliar with the word foundation. Basal convergence or basal expansion are words that are often heard.
The concept of foundation difference
Because neutral products involve hedging, the current hedging tools include: stock index futures, income swap and securities lending hedging, among which stock index futures hedging is the main way. Therefore, the understanding of the relative formation of the concept of basis in the market refers to the price of stock index futures MINUS the price of spot index. When the basis is negative, we call it a premium, and when the basis is positive, we call it a premium.
For example, on July 10, the closing price of IC2009 contract was 66 19.6, while the corresponding closing price of CSI 500 index was 6676.44, with basis = 6 19.6-6676.44 =-56.84, with a discount of 56.84 points.
However, in the process of firm offer, the basis of the product is not calculated by the closing price of stock index futures, but by the settlement price of the exchange. The exchange will calculate a settlement price by weighting the average price with the trading volume of the last hour to prevent the market from fluctuating too much and affecting the market.
If we continue to understand with the above example, the settlement price of IC on July 2009 10 is 66 1 1.4, then the basis should be -65.04. After conversion, the annualized basis should be (current basis point/index closing price)/transaction days at contract expiration * annual transaction days, and the maturity date of IC2009 is 2020/9/ 18, so the annualized basis of IC July 2009 10 should be: (-65.04/6676.44).
Here, we also released the changes in the annualized basis of IC contracts in the current quarter of this year. It can be seen that the recent annualized basis is in a very low position, even at a relatively low historical level.
Changes of annualized basis of IC contract in this quarter since this year
Relationship between basis and hedging cost
As we all know, the income of neutral products in the market is composed of bulls and bears.
Long position is to quantify the excess return (or alpha return) of stock selection portfolio relative to index (such as CSI 500 index), which we will not discuss for the time being. In the short part, we hope to hedge the price of the index (that is, beta), but in fact, the index can't be short, and it can only be replaced by stock index futures, and there is a basis between stock index futures and the index, so we have to pay extra basis cost when hedging.
Another concept is the convergence of basis-when a contract of stock index futures is close to delivery, the basis will definitely tend to zero, which is called the convergence of basis.
Therefore, the basis of neutral products is negative when they open positions, and shorting stock index futures means paying a certain basis cost and locking in advance when they open positions.
The withdrawal of neutral products is closely related to the convergence of basis.
Returning to figure 1, we can see that the negative basis converges rapidly with the recent sharp rise in market sentiment, and even there is a premium, and the convergence rate of far-month contracts is much greater than that of recent contracts. For neutral products with deep discount, it will cause a sharp retreat, and as mentioned before, this is only to pay the cost of locking when opening positions in advance; For neutral products that build positions when the cost is low, they just spit back the floating profit brought by the deepening discount.
In the current market environment, the cost of hedging is greatly reduced. In fact, now is a good time for investors considering neutral products to open positions. ?
IC monthly contract day basis
In short, the basis cost has been locked as early as the opening of the warehouse, and will be fully realized when it is delivered; During the holding process, with the expansion or convergence of negative basis (convergence or expansion of positive basis), the product will appear floating profit or floating loss.
Finally, for neutral products, the ideal situation is of course that you can earn both basis money and excess money. It is not a bad thing if you can open a position when the basis money or excess money is booming.
Let's use a special case to illustrate this problem: suppose the CSI 500 index remains unchanged at 6000 points, and it will remain the same one month later, and we are currently shorting the IC stock index futures to be delivered one month later (assuming 5000 points), then it is equivalent to paying the basis cost of 1000 points from now until the delivery date, and this cost is locked. If stock index futures sometimes converge sharply and sometimes spread outward in the process of convergence, the income of neutral products will fluctuate because of the fluctuation of basis-but please remember that these are temporary and the final cost remains unchanged.
In addition, in the process of firm offer, the hedging end also involves the issue of moving positions, that is, changing short positions into contracts one month further before the expiration of a contract. In the environment of negative basis, the market often has poor expectations, which leads to a deeper discount on distant contracts than on recent contracts, so it is a pity that extra warehouse moving costs are needed every time.
Let's assume that the index price remains unchanged.
The above figure shows the extra cost when moving the warehouse to change the moon. Of course, this cost is determined by the price difference between the two contracts, which fluctuates constantly during the firm offer.
Compared with the situation of negative basis, when positive basis appears, if neutral products just open positions at premium, this basis is no longer the locked cost, but the income brought by the basis, and the new fund will enjoy the extra income generated when the positive basis converges at maturity. Of course, in the process of firm offer, there will be floating profit or floating loss due to the contraction or expansion of positive basis.