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by Ashraf Laidi
Posted: Feb 22, 2010 5:00
Comments: 2338
Posted: Feb 22, 2010 5:00
Comments: 2338
Forum Topic:
USD
Discuss USD
(note that CTD = Cheapest-to-deliver treasury that will meet the delivery stipulations of the futures contract)
(CTD Price - CTD Carry - Option) / CTD Factor
The basis net of carry is the option value, or theoretical option value.
If the basis net of carry is cheap, then the futures are rich. If the basis net of carry is rich, then the futures are cheap. Any disparities will be quickly arbed out by the market and its participants.
this is certainly correct. However if the 10 y future drops this could be reflecting an oversupply of UST
or the expectation thereof. This is I think equivalent to expectation of rising yield. If it were a commodity future it were backwardation. I am wrong ?
Add to this additional distortions that can result due to the futures contract being too cheap or too rich to the cash treasury it is referencing as the cheapest-to-deliver (i.e. may be rich since requires less cash outlay than the cash treasury, etc.).
Ashraf