Applied Study On Future-Spot Arbitrage Strategy In China’s Treasury Bond Futures

The upcoming of5-year Treasury Bond Futures marks a great stepmoving forward for China’s capital market, to create new ways and newmeans for the products and trading of the bond market, and even thewhole financial market. The Treasury Bond Futures arbitrage, especiallythe future-spot arbitrage strategy using basis trading, is of both the usevalue and practical significance. The purpose of this paper is to explorethe effectiveness of future-spot arbitrage strategy after the launch of the5-year Treasury bond futures.This paper first introduces the overview, history and development,and lessons learned of Treasury bond futures (short for TF), and thenexpounds its contract and pricing, focusing on the data interpretation forTF’s pricing elements: conversion factor (CF) and the cheapest-to-deliverbonds (CTD), and then expounds TF’s pricing theory, i.e. cost of carrymodel and the CTD bonds arbitrage principle.Then, this paper briefly introduces the basic theories of arbitrage and the arbitrage types of Treasury Bond Futures, and elaborates basis trading,a simple method for future-spot arbitrage strategy with the help ofqualitative method.Finally, from the vertical and horizontal comparisons, this paperstudies the cases of Chinese Treasury bond futures in1990s, the ChineseCSI300stock index futures, the5-year simulation Treasury Bond Futuresand short-term U.S. Treasury Bond Futures, in order to explore theeffectiveness of future-spot arbitrage in the upcoming5-year TreasuryBond Futures.