Reading 17.1

two methods to identify the CTD

1. bond that geneates highest return on a cash and carry trade

2. lowest basis bond (basis= spot - future price)

What is teh bias in computation of CF thing…

if yields are lower than 6% - bias to short duration (how coup low maturity) securities

if yields are greater than 6%- bias to long duration securities

future position to hedge long bond portfolio

sell treasury bond futures

if rates rise then the futures value falls and you beneift on that ened

why do treasury futures prices tend to correlate w the CTD bond

bc the CTD had the lowest basis

why is hedging not perfect

1. hedge construcuted with CTD bond… if slope of curve changes the CTD may chnage and the duration of treasury bond future will chnage

2. duration not perfect measure of price change.. ignores convexity

3. mod duration only capture parallel shift,, does not grab shaping risk