Capital Market-Session 3
1) Here attached is a table with different money markets rates. Can you update
this putting the most recent rates.
Bloomberg Date
Fed Effective Depo
T-Bill 1 month o/n (overnight 1 day)
T-Bill 3 month t/n (tomorrow next day)
SOFR s/n (T+2 1 day rate)
Treasury bonds
2yrs Fed Fund rate
Agcy (mbs)
30D Repo
CP Top Tier Govvies
7D Mortgage
15D Agency
30D ABCP (top Tier)
CD's 1D
1M 7D
3M 15D
6M
OIS U$ Swaps Euro Repo (RepoFundsRate)
1M 1 day RFR Germany
2M 1 week RFR Italy
3M
Euro ESTR
Euribor 1month
Euribor 3 months
2) what is a repo (repurchase agreement): A repo is an agreement to sell a security to an
investor and buy it the following day at slightly higher price (or lower if negative rates). It is
a short term collateralized borrowing method. Although the vast majority of repo are done on
an overnight basis (ie 1 day), repos can have maturities up to 1 years. The collateral of a repo
can be Government Bonds, Agencies, MBS, but also equities (equity repos). Repos are
governed by the international GMRA agreement. Repos are often used by central banks to
inject or remove liquidity from the financial markets, or as a monetary policy tool.
3) What is the SOFR and why is different from Libor
Secured Overnight Financing rate (SOFR) is the rate based on transactions in the Treasury
repurchase market.
It is different from the LIBOR since it is set in US and it is based on observable data (ie
executed repo transactions) rather than estimated borrowing rates determined by a pool of
bank in London. The SOFR is replacing the Libor for US derivatives and floating rates bonds
and loans
LIBOR is gradually being removed as a benchmark (only legacy products remains) also for
all the other main currencies for UK by SONIA, for EUR by ESTR, JIBOR.
4) What is an the ‘hair-cut’ on a repo transaction
Is the % of discount applied to the collateral value.
5) What hair cut would you expect for (range 0% to 25%):
US 10 years Treasuries (0-1%)
US 5 yrs treasuries (0-1%)
Italian BTPs (2-5%)
US equities (part of S&P 500) (5%)
High yield corporate debt (20%)
A basic method to determined an haircut would be to predict the probability of recovery
from the sale of the collateral in a distress market condition
6) What does it mean that a repo is ‘daily marked to market’
At close of business the collateral is repriced based on closing prices, and it is matched versus
the cash lent (adjusted by the applicable hair cut) . If there is a deficit, a margin call will be
issued and needs to be paid by the next day
7) An arbitrageur investor is specialized in “Bond basis trading”.
Define:
Gross Basis: [bond cash pz- (future price * conversion factor)]
Net Basis: Gross Basis - (AId-AIs) + Repo Rate * Dirty Price*days/360
Conversion Factor: the multiplier to apply to the future price to convert it into the bond.
Cheapest to Deliver: The cheapest bond within the delivery basket to deliver at the future
expiry.
Delivery Option: the optionality the short future holder has in choosing which bond to deliver
within the delivery basket.
8) Given the following mkt prices, what will an arbitrageur do to take advantage of the basis
(ignore the carry costs)?
CTD bond pz 99.75 (CF 1.035)
Bond future Pz 95.65
a) sell the CTD bond and buy the bond future (positive gross basis [99.75-
(95.65*1.035)]=0.8
b) buy the CTD bond and sell the future
