Event-Driven and Arbitrage Strategies › Key Parameters
Michael BrenndoerferJanuary 6, 20261 min read
Quantitative FinanceAll chapters Part 11 of 15Quantitative Trading Strategies
Event-Driven and Arbitrage Strategies › Key ParametersOne section · Sections in this chapter7 / 11 ↓
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The key parameters for fixed income arbitrage models include:
- Duration: The sensitivity of a bond's price to changes in interest rates, used to hedge yield curve risks.
- Spread: The yield difference between two securities, such as the on-the-run and off-the-run Treasuries.
- Carry: The net holding cost or benefit of a position, accounting for coupon income and financing costs (repo).
- Basis: The price difference between the cash bond and the adjusted futures price.
- CTD: Cheapest-to-Deliver bond, which determines the futures pricing.
- Conversion Factor (CF): Factor used to equate the deliverable bond to the futures contract standard.
- Repo Rate: The financing cost for holding the cash bond (carry).
- Implied Repo: The rate of return earned by buying cash, selling futures, and delivering.
The net basis typically should be near zero if markets are efficient. A significantly positive net basis suggests the cash bond is expensive relative to futures (sell cash, buy futures), while a negative net basis suggests the opposite trade.