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Closing the Gap - Futures Edition

Rolling March-June /ZB Futures

| Jan 30, 2015
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    Closing the Gap - Futures Edition

    Rolling March-June /ZB Futures

    Jan 30, 2015

    In this episode, Pete discusses the rollover process in which traders carry forward their positions in a futures contract, from one expiration date to another. Traders can either let a position expire or carry forward their bets. They can do this by entering into a similar contract expiring at a future date. The presentation continues by looking at the closing price of the spread between the /ZBZ14 contract and the /ZBH15 contract. This is the spread between the December and the March 30 year bond contract.

    By examining the open interest (which is the total number of longs or shorts in the market) between the two month, one can see that the new month’s open interest is equal to the old month’s open interest after the roll. Pete then illustrates this in a graph where we can visually see the open interest in the expiring month decline and the open interest in the next month begin to increase reaching the same level. Continuing on with open interest Pete notes that volume is often concentrated in the front month until the roll. Also to note, only a small percentage of total open interest goes all the way to delivery. Positively sloped yield curves and positive carry impose price discounting on deferred contract months.

    Next Pete looks at why the big price jump in the classic bond between March 15 and June 15 exists. By this we are seeing a 19 point jump, if a positive sloped yield curve and positive carry impose price discounting on deferred contract months. We see that there was a change in the amount of time the newly listed bonds have for sensitivity and duration. The price of the June 15 contract is significantly higher than the March 2015 because the greater duration of the cheapest to deliver (CTD) and this results in a higher price of the underlying bond. What happened was the U.S. Treasury suspended issuance of the 30 year bonds between early 2001 and early 2006, thus creating a gap in the delivery basket of bonds.

    So to make the delivery basket more uniform, the CME Group decided to exclude the 5-⅜% February 2031 US Treasury bond from contract grade eligibility for the June 2015, September 2015, and December 2015 delivery months. The change in the delivery basket affects the valuation of the contract. Both the implied BPV and the implied modified duration go up in value. Finally, the June 2015 contract is significantly higher than the March 2015 because the greater duration of the CTD results in higher price of the underlying bond.

    This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.

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