Carry in Cash-Settled Bond Futures

Summary

The document asks whether cash-settled bond futures have a carry effect comparable to that of physically settled contracts. Physical delivery can connect futures pricing to a deliverable bond, making coupon income and financing costs relevant. By contrast, the question describes some cash-settled contracts as priced using a constructed bond and an average yield from a basket, rather than by carrying an underlying deliverable.

It raises the practical issues of whether such futures can be replicated and whether interim coupons or financing costs enter their pricing. The document provides no answer, calculation, market data, or evidence resolving those issues. It is therefore useful as a prompt to investigate contract-specific pricing and replication, but it does not establish that carry is absent or explain how traders should measure it. Conclusions would require details of the relevant contract and its settlement methodology.

Key ideas

• Physical settlement can link bond futures pricing to a deliverable bond and its carry.
• Some cash-settled contracts are described as using a constructed bond and basket yield.
• The document questions whether coupon and financing effects apply to cash-settled futures.
• It offers no resolution, so conclusions require contract-specific pricing details.

Tags

# Is there Carry Effect for Cash Settled Bond Future


# Is there Carry Effect for Cash Settled Bond Future












As we know, physical settle bond future would expose carry effect which would be the deliverable bond coupon and your financing cost (cost of carry as a sum term). This is because it can be replicated with the underlying bond.

However, cash settle futures such as those traded in Australia or Korean, the future price is not typically determined through cost of carry model with the underlying deliverable. Instead, they are determined by creating a fake bond and discounted with the average yield from the basket.

In this sense, would the replication even possible? Also, due to the way the future price is determined, I don't see the interim coupon or financing cost even play a role here.

So, do people calculate carry effect for cash-settle bond future?

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.