IRF Brochure

8/11/2019 IRF Brochure

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Page 1

INTEREST RATE FUTURES

"Safeguard your interest in the future”



Page 2

Contents

NSE – An Overview...…..…………………….03

Interest Rate Futures – A Global Perspective…04

New prospects with Interest Rate Futures….....05

Interest Rate Futures : Key Concepts …………07

Interest Rate Futures at NSE ………………….12

Product Specifications…………………………13

Uses of IRF for Market Participants...…………16

Key Benefits of Interest Rate Futures…………18

Case Studies…………….………..…………….20

Contact Us…………………………………......24



Page 3

National Stock Exchange – An Overview

National Stock Exchange of India Limited (NSE) is an electronic exchange with a nationwide

presence. It offers trading facility through its fully automated, screen based trading system. A variety

of financial instruments, which includes, equities, debentures, government securities, index futures,

index options, stock futures, stock options, currency futures, Interest Rate Futures etc. are traded on

its electronic platform. NSE is the largest stock exchange in India, with a significant market share in

equities ,and in derivatives equities/equity indices/currency. It is also one of the leading globa

exchanges. NSE uses a state of the art telecommunication network to provide investors an efficient

and transparent market.

NSE has created new benchmarks in technology infrastructure, risk management systems, clearing

and settlement systems, investor services and best market practices. It has been in the fore front

offering newer products in equities and derivatives and also new asset classes for the investors to

choose from.

Milestones / Achievements

Over the years NSE has achieved a series of milestones and landmarks, which have had a significant

impact on the securities trading environment in the country.

November 1992 Incorporation

April 1993 Recognition as a stock exchange

November 1994 Capital Market Segment goes liveApril 1995 Establishment of NSCCL, the first Clearing Corporation

October 1995 Became the largest stock exchange in the country

April 1996 Launch of S&P CNX Nifty

June 1996 Establishment of Settlement Guarantee Fund

December 1996 Commencement of trading/settlement in dematerialised securities

February 2000 Commencement of Internet Based Trading

June 2000 Commencement of Derivatives Trading (Index Futures)

June 2001 Commencement of trading in Index Options

July 2001 Commencement of trading in Options on Individual Securities

November 2001 Commencement of trading in Futures on Individual Securities

November 2006 NSE awarded 'Derivative Exchange of the Year', by Asia Risk magazineMarch 2008 Launch of long term option contracts on S&P CNX Nifty

April 2008 Launch of Securities Lending & Borrowing Scheme

April 2008 Launch of India VIX – The Volatility Index

June 2008 Setting up of Power Exchange India Ltd

August 2008 First exchange in India to launch Currency Futures contracts

August 2009 Launch of Interest Rate Futures

November 2009 Launch of Mutual Fund Service System

December 2009 Commencement of settlement of Corporate Bonds

February 2010 Launch of Currency Futures on Additional Currency



Page 4

Interest Rate Futures – A Global Perspective

Interest Rate Futures contracts were first traded in the United States on October 29, 1975 in responseto a growing need for tools that could protect against sharp movements in interest rates. Since then

Interest Rate Futures have become a fundamental risk management tool for financial markets

worldwide.

Interest Rate Futures are the most widely traded derivatives instrument in the world. The total

outstanding notional principal amount in Interest Rate Futures is 25.48 times higher than equity

index futures.

Source: BIS

The total turnover in the year 2008 for Interest Rate Futures was around USD 14,00,000 billion,

which is around 10.5 times higher than equity index futures. The table given below shows the

enormous contribution made by Interest Rate Futures in the global derivatives markets:

Turnover USD in Billion

Regions / Markets Interest Rates

North America 774439.10

Europe 543902.30

Asia & Pacific 63811.50

Other Markets 10645.50

TOTAL 1392798.40

Source: BIS



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Interest Rate Futures in India – New Prospects

With the commencement of Interest Rate Futures trading under a new framework, the Indian

financial markets would achieve another milestone.

Interest rates are linked to a variety of economic conditions. They can change rapidly, influencing

investments and debt obligations. In a market environment where long term debt issuance by the

government is increasing and the demand for it is growing, there is a strong need for a cost efficient

hedging instrument against interest rate risk.

The last five year’s government borrowings are indicated in the graph below.

Source: RBI

Market participants hold large amounts of GOI Securities which are impacted in value due to interest

rate fluctuations.

Over the last decade, the movement in the 10 year Benchmark Government of India (GOI)

securities’ yield has shown significant movement, ranging from 5% to 12%.



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10 Year Benchmark Government of India security Yield rate

Source Reuters - INBMK

Interest rate risk is the uncertainty in the movement of the interest rates. Interest rates have never

been constant in the past and one can easily presume they would not remain constant in the future

The volatility of interest rates has increased manifold in the last couple of years. The annualized

volatility of yield of 10 year benchmark GOI security for the calendar year 2008 has been 17.40%

compared to 8.51 % in 2007. Such volatility increases risk and requires tools to manage risks.

Interest Rate Futures are the product for managing the interest rate risk.



Page 7

Interest Rate Futures – Key Concepts

Interest Rate

Interest rate is the amount charged, expressed as a percentage of principal, by a lender to a borrower

for the use of assets. They are typically noted on an annual basis, known as the annual percentage

rate (APR). E.g. 6.05 Feb 2019 security bears an interest rate of 6.05% annually which is also

referred as coupon.

Does the rate of return remain same throughout the tenure of the bond? No, to measure the rate of

return on your investment lets understand the concept of yield.

Yield

Yield is the income (return) on an investment. This refers to the income received from a security and

is usually expressed as a percentage (annual return) based on the investment's cost, its current market

value or its face value. Yield and price of a bond have an inverse relationship. As yield increases, the

price of the bond decreases and vice-versa.

Always an avid investor would be interested to know the period it takes to recover his initial

investment in the bond. The concept of duration shall explain this.

Duration

The term duration has a special meaning in the context of bonds. It is a measurement of how long, in

years, it takes for an investment in a bond to be repaid by its internal cash flows. It is an important

measure because bonds with higher durations carry more risk and have higher price volatility than

bonds with lower durations.

Duration is expressed as the number of years (measured as a weighted average) in which the bond

will pay out. Basically, duration is a weighted average of the maturity of all the income streams from

a bond or portfolio of bonds. So, for a two-year bond with 4 coupon payments every six months of

Rs. 50 and a Rs. 1000 face value, duration (in years) is 0.5(50/1200) + 1(50/1200)+ 1.5(50/1200)+

2(50/1200) + 2(1000/1200) = 1.875 years.



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Modified duration is a measure of the sensitivity of the price (the value of principal) of a fixed-

income investment to a change in interest rates. Rising interest rates mean falling bond prices, while

declining interest rates mean rising bond prices. The greater the duration number, the greater the

interest-rate risk or reward for the bond.

Modified duration does not factor the bigger change in the yield and represents linear relationship

However to measure the curvature in the relationship between bond price and yield, a concept called

convexity is used.

Convexity

Convexity is the measure of the curvature in the relationship between bond prices and bond yields

that demonstrates how the duration of a bond changes as the interest rate changes. It is used as a risk-

management tool, and helps to measure and manage the amount of market risk to which a portfolio

of bonds is exposed.



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Price Yield Relationship

Yield

Change in the price is in response to change in yield which can be measured using duration and

convexity.

Types of Yield Curve

A yield curve visually depicts the term structure of interest rates for debt instruments of the samequality (rating).

Positive Yield Curve

A Yield Curve in which long-term rates are

higher than short-term rates. The yield

curve has an upward slope, meaning longer

maturities earn a higher rate of interest. Itis also known as a normal yield.

In a positive yield curve environment,

prices of corresponding financial futures

contracts decrease the more the delivery

date is deferred.



Page 10

Negative Yield Curve

Flat Yield Curve

Interest Rate Futures

An Interest Rate Futures contract is "an agreement to buy or sell a debt instrument at a specified

future date at a price that is fixed today."

Exchange traded Interest Rate Futures are standardized contracts based on a notional coupon bearing

GOI security. The contract shall be physically settled by delivering deliverable grade securities.

Yield Curve in which short-term rates are

higher than long-term rates. A negativeyield curve typically occurs during a period

of inflation, when heavy demand for credit

pushes short-term rates up in relation tolong-term rates.

Financial futures prices would then be

lower for shorter-dated maturities relative

to longer maturities.

A flat yield curve may result when there islittle or no credit premium demanded for

longer-term loans and investments. A flatcurve may be slightly positive, slightly

negative, or even slightly humped.



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Accrued interest

Accrued interest is the interest amount accrued from last coupon payment date up to the day prior to

the settlement date. It is calculated using 30/360 day count convention which assumes each month

has a period of 30 days.

Invoice Price

It will be the price paid by the Long position holder of contract to short position holder on settlement

of contract. Invoice price = (Futures Settlement price * Conversion factor of the delivered bond) +

Accrued Interest.

Conversion Factor

The conversion factor equates the deliverable security (per rupee of principal), to yield 7% with

semiannual compounding.

Cheapest to Deliver Bond (CTD)

Bond which can be bought at cheapest price from underlying bond market and delivered against

expiring futures contract is called CTD bond. It will be a bond where difference between “Quoted

price of Bond – (Futures Settlement Price * Conversion Factor)” is the most beneficial to seller.

Security

Futures

Settlement

Price #

Quoted

Price of

Bond (A)#

Conversion

Factor

Futures

Price*CF

(B)

Difference

(A-B)7.46- 2017 100 102.74 1.0270 102.70 0.04

6.05-2019 100 95.64 0.9360 93.60 2.04

6.35-2020 100 96.09 0.9529 95.29 0.80

7.94-2021 100 104.63 1.0734 107.34 -2.71

8.35-2022 100 107.02 1.1113 111.13 -4.11

6.30-2023 100 89.75 0.9395 93.95 -4.20#Futures settlement price and quoted price of bonds are assumed.



Page 12

Interest Rate Futures at NSE

Robust trading systems, clearing and settlement systems and technology are the key to an efficient

and effective financial market. NSE, India’s largest stock exchange, has proven its ability to master

the challenge of providing the best systems and practices for the markets. NSE’s Interest Rate

Futures offer the same reliable features as its other products.

Let’s understand the advantages of NSE’s Interest Rate Futures :

• Standardization and Flexibility

Interest Rate Futures contract offers market participants a standardized product which they

can use conveniently for taking a view of the future direction of the market, hedging and

creating income strategies.

• Price Transparency and Liquidity

Electronic trading platform of NSE ensures transparency of prices, volumes and trade data

Trading standardized contracts results in a concentration of order flows, thus ensuring market

liquidity.

• Leverage Effect due to a wider collateral management

Due to widened scope of collateral acceptance by NSE, participants can take advantage of

leverage by investing in futures contract. Also participants can benefit by using a single

collateral pool for both currency and Interest Rate Futures trading.

• Advance trading software and technological edge

Trading on NSE takes place via NEAT plus and NOW (NEAT on Web) systems through

which large numbers of trading terminals have direct access to the market.

• Centralized clearing supported by guaranteed settlement

Trades are settled through India’s only ‘AAA’ rated clearing corporation, the National

Securities Clearing Corporation Limited (NSCCL), which acts as a central counterparty to alltrades and guarantees financial settlement.

• Managing counterparty risk

The efficient risk management system of NSCCL eliminates the risk of counterparty default

due to novation of trades by its clearing corporation.



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Product Specifications

Particulars Description

Symbol 10YGS7Market Type N

Instrument Type FUTIRD

Underlying 10 Year Notional Coupon-bearing Government of India (GOI) security

Notional Coupon 7% with semi-annual Compounding

Tick size 0.25 paise or INR 0.0025

Trading Hours 9:00 am to 5:00 pm (Monday to Friday)

Contract Size INR 2 lakhs

QuotationSimilar to quoted price of GOI securities up to four decimals with 30/36day count convention.

Tenor Maximum Maturity: 12 months

Contract CycleFour Fixed quarterly contracts for entire year ending March, June,September & December. To start with NSE has introduced two quarterly

contracts

Daily Settlement Price

Volume Weighted average price of the contract during the time period

specified by the Exchange. If not traded in specified timings then the

theoretical price of the contract as determined by the exchange will bethe daily settlement price

Settlement Mechanism• Daily Settlement - Marked to market daily

• Final Settlement - Physical settlement on delivery day in the

delivery month i.e. last working day of the month

Deliverable Grade

Securities

• GOI Securities maturing at least 8 years but not more than 10.

years from first day of the delivery month with a minimum totaoutstanding of Rs 10,000 crores. The list of the deliverable grad

securities will be informed by the exchange from time to time.

• Further any new security which meets the eligibility criteria a

mentioned above shall be added to the list of deliverable gradsecurities. However, additions, if any, shall be made not later tha

10 business days before the first business day of the delivery month

Conversion FactorThe conversion factor would equate the deliverable security (per rupee o

principal), to yield 7% with semiannual compounding.

Invoice Price Futures settlement price times conversion factor plus accrued Interest

Last Trading Day Two business day preceding the last business day of the delivery month.

Delivery Day Last business day of the delivery month.

Initial MarginSPAN ® Based Margin subject to minimum 2.33% on first day and 1.6%

subsequently.

Extreme loss Margin 0.3% of the value of the gross open positions of the futures contracts



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Physical Settlement Mechanism

• The Interest Rate Futures contracts at NSE would be physically settled by the delivery of

deliverable grade securities.

• Physical delivery will be through electronic book entry system of NSDL, CDSL and

SGL/CSGL Settlement through RBI PDO

• Settlement cycle: T+2 delivery with seller’s intention to deliver two business days prior to

actual delivery date.

Position Limits

Position limits shall be applicable on gross open positions across all contracts.

• Client Level: It should not exceed 6% of the total open interest or Rs. 300 crores whichever

is higher.

• Trading Member Level: It should not exceed 15% of the total open interest or Rs. 1000

crores whichever is higher.

• Clearing Member Level: No separate position limit is prescribed at the level of clearing

member. However, the clearing member shall ensure that his own trading position and the

positions of each trading member clearing through him is within the limits specified above.

• FIIs: Total gross long position in the debt market and the Interest Rate Futures contract

should not exceed their individual permissible limit for investment in government of India

securities as prescribed from time to time. Short position in Interest Rate Futures contract

should not exceed long position in the government of India securities market and in Interest

Rate Futures.



Page 15

Interest Rate Futures (IRF) and Market Participants

Market Participants

•

Banks and Primary Dealers

• Mutual Funds and Insurance Companies

• Corporate houses and Financial Institutions

• FIIs

• Member Brokers and Retail Investors

How to participate in Interest Rate Futures trading at NSE

Interest Rate Futures can be bought and sold through the trading members of the National Stock

Exchange. To open an account with a NSE trading member you will be required to complete the

formalities which include signing of member constituent agreement, constituent registration form

and a risk disclosure document. The trading member will allot you a unique client identification

number. To begin trading you will be required to deposit cash or collateral with your trading

member as may be stipulated by them.

Eligibility Criteria

• The members registered by SEBI for trading in currency / equity derivatives segment shall be

eligible to trade in Interest Rate Derivatives also subject to meeting following criteria

o Net worth of Rs. 1 crore for Trading members

o

Net worth of Rs. 10 crores for Clearing members



Page 16

Uses of IRF for Market Participants

Banks and Interest Rate Futures

•

Managing duration gap with respect to change in interest rates.

• Protecting against the devaluation of G-sec in AFS and HFT portfolios.

• Hedging against re-pricing risk related to volatility of cash flows due to revaluation of assets

and liabilities over a period of time.

• Mitigating Basis risk when yield on assets and costs on liabilities are based on different

benchmarks.

Primary Dealers and Interest Rate Futures

• Underwriting of primary issues is carried out by the primary dealers, who also enable market

making for government securities. Interest Rate Futures can be used to minimize the risk due

to volatility of interest rate when primary dealers are exposed to meeting their underwriting

commitment.

• With increasing government borrowings, the pressure on primary dealers to adhere to

obligations is enormous. IRF will help to minimize the securities portfolio risk.

Mutual Funds, Insurance Companies and Interest Rate Futures

• It can mitigate interest rate risk arising out of huge exposure to government securities and

corporate debt.

• Optimizing the portfolio returns.

• IRF can provide another avenue to mutual funds for improving investment income by

arbitrage between cash and futures markets of the debt segment, as well as through spread

trading strategies.

•

Maximizing the return on investments of insurance companies in interest bearing securities,thereby minimizing the actuarial risk for the insurance company.



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Corporate Houses and Interest Rate Futures

• Companies can reduce their borrowing cost by using IRF to manage company’s exposure to

interest rate movement.

• By using IRF to manage interest rate risk companies can optimize the cost of capital to

company leading to optimal “debt-equity” ratio.

• Improve the credit rating for a corporate by enhancing the debt-service coverage ratio and the

interest coverage ratio by better risk management using IRF.

• Corporate can convert their fixed rate borrowing to floating if view is of a falling yield.

FIIs and Interest Rate Futures

•

Hedging against underlying GOI securities portfolio.

• FIIs having a view on long term interest rate could benefit by participating in new asset class.

Member brokers, Retail investors and Interest Rate Futures

• Brokers can use IRF for generating income by arbitrage between cash and futures market of

the debt segment.• With increased market participation in Interest Rate Futures member brokers can earn

additional income in the form of brokerage fee charged to clients.

• Portfolio management services to retail and corporate clients who are already trading in

equity and currency can be extended with introduction of IRF.

•

Small lot size provides retail investors to hedge their interest rate payment on home loans to

protect against rising interest rates.



Page 18

Key Benefits of Interest Rate Futures

•

Directional trading

As there is an inverse relationship between interest rate movement and underlying bond

prices, the futures price also moves in tandem with the underlying bond prices.

If one has a strong view that interest rates will rise in the near future and wants to benefit

from rise in interest rates; one can do so by taking short position in IRF contracts on NSE and

benefit from the falling futures prices.

Detailed example is explained in case study 1.

•

Hedge your Portfolio

Holders of the GOI securities are exposed to the risk of rising interest rates which in turn

results in the reduction in the value of their portfolio. So in order to protect against a fall in

the value of their portfolio due to falling bond prices, they can take short position in IRF

contracts on NSE.


• Calendar Spread Trading

A Calendar Spread, also known as an Inter-delivery Spread, is the simultaneous purchase of

one delivery month of a given futures contract and the sale of another delivery month of the

same underlying on the same exchange. This type of spread is called a "calendar spread"

because it is based on different calendar months.

For instance, buying a September 09 contract and simultaneously selling a December 09

contract. A market participant can profit (or lose out) as the price difference between the two

contracts widens or narrows.




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•

Reduce the duration of portfolio

As the bonds with longer maturities are more sensitive to interest rate changes, bond

portfolio with longer duration will be more exposed to the vulnerability of the movement in

interest rate.

A Portfolio manager who is concerned about the rise in short term interest rate risk would

like to reduce the duration of the portfolio. By entering into an IRF contract on NSE, the

portfolio manager can reduce duration of the portfolio.

The below formula denotes the approximate number of contracts which needs to be entered

into to achieve the desired duration

Approximate number of contracts ×

×

×

= −

CTDCTD

t t T

P D

P D D )( Conversion Factor of CTD Bond

DT = Target duration of portfolio

Dt = Initial duration of portfolio

Pt = Initial market value of portfolio

DCTD = The duration of cheapest to deliver bond

PCTD = The value of cheapest to deliver Bond (Price * contract multiplier)

•

Arbitraging between cash and futures market

Arbitrage is the price difference between the bonds prices in underlying bond market and IRF

contract without any view about the interest rate movement.

One can earn the risk-less profit from realizing arbitrage opportunity and entering into the

IRF contract traded on NSE by initiating cash and carry trade involving the following steps:

• Purchase the cheapest to deliver bond

• Take short position in IRF contract

•

Finance the bond purchase at the current borrowing rate from the market.• Give the intention of delivery to the exchange

• Deliver the bond and receive the invoice price.

• Repay the cash amount borrowed to purchase the bond.




Page 20

Case Studies

Case study 1: Directional trading

A trader expects a long term interest rate to rise. He decides to sell Interest Rate Futures

contracts as he shall benefit from falling future prices.

• Trade Date- 5th

Oct 09

• Futures Delivery date – 1st Dec 2009

• Current Futures Price- Rs. 93.50

• Futures Yield- 7.36%

• Trader sell 250 contracts of the Dec 09 10 Year futures contract on NSE on 5th

Oct 2009 at

Rs. 93.50

Daily MTM due to change in futures price is as tabulated below

DateDaily Settlement Price*

(Rs.) Calculation MTM (Rs)

5-Oct-09 93.6925 250*2000*(93.5000-93.6925) -96250.00

6-Oct-09 93.4625 250*2000*(93.6925-93.4625) 115000.00

7-Oct-09 93.4575 250*2000*(93.4625-93.4575) 2500.00

8-Oct-09 93.1275 250*2000*(93.4575-93.1275) 165000.00

Net MTM gain as on 8th

Oct 09 is Rs. 1,86,250 (I)

* Daily Settlement price shall be the weighted average price of the trades in the last ½ hour of

trading.

Closing out the Position

• 9th

Oct 2009- Futures market Price – Rs. 93.1125

• Trader buys 250 contracts of Dec 09 at Rs. 93.1125 and squares off his position

• Therefore total profit for trader 250*2000*(93.1275-93.1125) is Rs.7,500 (II)

• Total Profit on the trade = INR 1,93,750 (I & II)



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Case Study 2: Hedging

A bank has a large portfolio of GOI securities worth Rs. 25 crores. Bank’s portfolio consists of

bonds with different coupons and different maturities.

In view of rising interest rates in the near term, the treasury head is concerned about the negative

effect this will have on the bank’s portfolio. The treasury head wants to hold his entire portfolio and

at the same time doesn’t want to suffer losses on account of fall in bond prices.

Should the bank go short or long on the futures contracts to establish the correct hedge?

The treasury head decides to hedge the interest rate risk by taking a short position in the Interest Rate

Futures on NSE.

Example :

Date: 05-Oct-2009

Spot price of GOI Security: Rs 98.0575

Futures price of IRF Contract: Rs 93.7925

On 05-Oct-2009 XYZ bought 2000 GOI securities from spot market at Rs 98.0575. He anticipates

that the interest rate will rise in near future. Therefore to hedge the exposure in underlying market he

may sell Dec 09 Interest Rate Futures contracts at Rs 93.7925

On 16-Nov-2009 due to increase in interest rate:

Spot price of GOI Security: Rs 97.2500

Futures Price of IRF Contract: Rs 93.1500

Loss in underlying market will be (97.2500 - 98.0575)*2000 = Rs 1615

Profit in the Futures market will be (93.7925 – 93.1500)*2000 = Rs 1285



Page 22

Case Study 3: Calendar Spread Trading

A long & short position in different futures contracts on the same underlying is called as a calendar

spread.

If a Long position in a Dec 09 IRF contract versus a Short position in the Mar 10 IRF contract on

NSE is considered a calendar spread.

Since a calendar spread entails only the basis risk, the bank runs little risk on the positions.

Example:

Trade Date : 5th

Oct ’09

Dec ’09 Futures (Rs.) : 93.3600 – 93.3800

Mar ’10 Futures (Rs.) : 91.9700 – 92.0200

The difference between the Dec 09 & Mar 10 contracts is currently Rs. 1.41 (after considering bid-

ask). If the trader believes that this spread is very high, he would execute a calendar spread by

Selling the Mar 10 futures at 91.9700

Buying the Dec 09 futures at 93.3800

10 days later

Trade Date : 15th

Oct ’09

Dec ’09 Futures (Rs.) : 93.0050 – 93.0250

Mar ’10 Futures (Rs.) : 91.3000 – 91.3700

The difference between the Dec 09 & Mar 10 contracts is now Rs. 1.6350 (after considering bid-

ask).

The trader may decide to liquidate his calendar spread trade by

Buying the Mar 10 futures at 91.3700 (Profit 0.60)

Selling the Dec 09 futures at 93.0050 (Loss 0.38)

Net profit of Rs. 0.22 without running any interest rate risk



Page 23

Case Study 4: Arbitrage

The price differential in the underlying bond market and the future market can also provide

opportunities to arbitragers. If the futures are expensive compared to the underlying,, then the

arbitrager can make profit by taking long position in underlying market by borrowing funds and

taking short positions in the future market. This is explained with following example.

On 15th

Oct, 09 buy 6.35% GOI ’20 at the current market price of Rs. 97.2550 and conversion factor

is 0.9815

Step 1 - Short the Dec 09 futures at the current price of Rs. 100.00 (7.00% Yield)

Step 2 - Fund the bond by borrowing up to the delivery period (assuming borrowing rate is 4.25%)

Step 3 - On 1st Dec ’09, give a notice of delivery to the exchange

Assuming the futures settlement price of Rs. 100.00, the invoice price would be

= 100 * 0.9815

= Rs. 98.15

Under the strategy, the bank has earned a return of

= (98.1500 – 97.2550) / 97.2550 * 365 / 49

= 6.86 % (implied repo rate)

(Note: For simplicity accrued interest is not considered for calculation)

Against its funding cost of 4.25% (borrowing rate), thereby earning risk free arbitrage

The bond with the highest implied repo rate would be the cheapest to deliver (CTD) bond.

The arbitrager would identify the bond with the highest implied repo rate or the CTD bond and

execute the strategy with the same bond, depending on its availability in the secondary market.



Contact Us

NATIONAL STOCK EXCHANGE OF INDIA LIMITED Exchange Plaza, Bandra Kurla Complex, Bandra (E),

Mumbai 400051, IndiaTel: + 91 22 26598100/ 66418100

Fax: + 91 22 26598120

Email: [email protected]

Web Site: www.nseindia.com

Disclaimer

Market Conditions can lead to substantial profit or loss. Investors are advised to seek adequate product and

market knowledge as well as proper investment advice before trading. The material provided here is for

general information purposes only. While care has been taken to ensure accuracy, the information furnished to

reader with no warranty as to accuracy or completeness of its contents and on condition that any changes

omissions or errors shall not be made the basis for any claim, demand or cause of action.

Documents

IRF Brochure