Basis trading, also known as "cash and carry" trading, refers to the activity of simultaneously trading cash bonds and the related bond futures contract. The "basis" of a futures contract is the difference between the spot price of an asset and its price for future delivery as implied by the price of a futures contract written on the asset. Futures contracts are exchange-traded standardized instruments, a form of what is termed a "forward" instrument. The simultaneous trading of futures contracts written on government bonds and the bonds themselves, "basis trading", is an important part of the government bond markets, and in this book we review the essential elements of this type of trading. We begin with basic concepts of forward pricing, before looking at the determinants of the basis, hedging using bond futures, trading the basis and an introduction to basis trading strategy. We also look at the concept of the "cheapest-to-deliver" bond, and the two ways in which this is measured, the net basis and the "implied repo rate". The book is illustrated with in-depth practical examples from the United Kingdom gilt market. It is written in an accessible style and should prove of use to anyone with an interest or involvement in the government bond futures market.
The 2nd edition of The Futures Bond Basis, is an updated and revised version of Professor Moorad Choudhry's succinct but in-depth look at the government bond futures contract basis. It includes essential background on contract specifications and the theory of the basis and covers the concept of the cheapest to deliver; price and delivery data for a sample of gilt contracts; the drivers of the basis and its dynamics; the mechanics of basis trading; a detailed explanation of gross and net basis, and an explanation of the implied repo rate with examples from the UK gilt market. The basic principles are applicable in any bond futures market.