Research On Basis Arbitrage Of China Treasure Future Based On Delivery Option

1. Research backgroundIn2010, the treasure futures development was set up and began to re-examine the relevant content bond futures.2011,treasure futures product begins to develop designing contract; November9,2011China Financial Futures Exchange opened internal treasure futures simulation trading; July5,2013, SEC announced The State Council has agreed to carry out treasure futures.September6,2013treasure futures officially opened for trading, treasure futures restarted after a lapse of18years. This makes investors to refocus this familiar and functional products. For the market arbitragers, which undoubtedly has a lot of opportunities.2. Questions about to answerThe greatest innovation of the new contract compared to the old one was that the underlying asset was no longer single bond. For the old contract, squeeze happened frequently due to the single delivery and underlying form, that was, when the trade volume in treasure future exceeded that of the spots or when spot market liquidity was not great enough, there would be a large amount of open positions available for the long side so that no delivery was available for the short side.While, for the new contract, the subject matter was the standard virtual bond with greater range of deliverable bonds. The new delivery system would definitely cause many new changes. The most important one was that treasure future short side had option in the new system which brought it the initiative while the long side could only accept what had been chosen by the short side. The influence of the option of the short side on the basis arbitrage of the treasure future which had to be held until its delivery, that was, the influence of different bonds on the space between positive and negative basis arbitrage (the number of days for appearance of arbitrage opportunities) and the arbitrage returns was researched.3. Ideas and logicIn the positive basis arbitrage strategy, arbitrageurs need to buy bond spot, short bond futures, held to maturity and deliver, which can get risk-free return. When buying a bond makes the biggest gains, this bond is called the cheapest to delivery bonds (CTD), while other bonds arbitrage gains are below it. So the optimal choice for positive basis arbitrage strategy is CTD.However, when the market are chasing CTD, CTD would occur premium or illiquidity in itself, and cannot be obtained. In this case the short side need the next optimal bond, the best choice can replaced CTD bonds (referred as suboptimal CTD) for delivery, in some cases also need to buy third or fourth optimal CTD, in this case the positive changes in how income arbitrage.Analytical methods are properly used, this paper according to sequence of theoretical CTD, suboptimal CTD, third best CTD, computing income of arbitrage, and observing changes and gains.4. Research methods and conclusionsThe empirical results illustrate the delivery system in bond futures options hollow square with a certain value when the short side choice theory CTD, the option value is fully utilized, this time with a positive arbitrage gain maximum reverse arbitrage space and minimum income; when empty square suboptimal choice, equivalent to transferring a portion of the right, so the arbitrage gain space contraction, choose three excellent arbitrage gains will further shrink. At the same time the long side income gradually increased.5The main features of this article(1)combination of theory and practice, combining Chinese market situation for the arbitrage base for analysis, the reality that there are certain guiding significance.(2) part the innovation of the hypothesis:the use of historical data to identify suboptimal TF1403and third excellent CTD compensate for the inadequacies of the theory, the conclusion was quite evident.(3) Short mechanisms bold assumption that bonds mature this condition, to make up for the lack of difference between the reverse arbitrage research base, this prior research.