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Strategies & Market Trends : Currencies and the Global Capital Markets -- Ignore unavailable to you. Want to Upgrade?

To: Michael Friesen who wrote (316)	6/30/1998 6:41:00 AM
From: Henry Volquardsen	Read Replies (1) \| Respond to of 3536

Michael, No that is not correct. The futures include the effect of financing. Remember futures are all cash deliverable. So when you calculate the value of the future you find the bond which is cheapest to deliver and then find the cost of financing that bond to the delivery date. In a positively sloped yield curve that will give you a price for the future delivery which is a higher yield and lower price than the cash equivalent of the same bond. So in the case of JGBs lets say the cash bond would be trading at 135. The Sept future, when including financing would trade at 134. If you short the future at 134 and the bond market remains stable the future will converge to cash at 135. The one point you lose is a reflection of the financing cost. If the futures get out of line with this financing cost, cash market participants, such as myself, will arbitrage it back into line. If you look at the futures sections in the paper and check the bond futures you will see that the later delivery dates are almost always at lower prices than the near dates. The contract specs are identical so the price difference is entirely a reflection of the financing. It is important to remember that futures do not allow you to side step financing costs, they just include them in the price. Henry