Choosing Between Cash Bonds, Swaps, Futures, and Options

Summary

The document considers why a leveraged fund might hold a cash bond to obtain interest-rate exposure when an OIS swap could provide similar sensitivity. It does not identify a universal pricing advantage when the instruments are fairly priced. Instead, the answer frames instrument choice as partly an operational and accounting decision: bonds occupy balance sheet and require financing, while swaps require legal documentation, margin handling, and counterparty-credit oversight. Internal cost allocation can make either instrument appear more or less expensive to a desk, even when those charges do not match the actual resources used.

Rates or bond futures and options are also named as alternatives for changing rate sensitivity. The discussion is qualitative and offers no market data, cost comparison, or trade example, so it does not establish which instrument is preferable for a particular fund. Its practical lesson is to include financing, infrastructure, margin, and internal charge structures in the comparison, alongside the intended exposure.

Key ideas

• Cash bonds, swaps, futures, and options can all provide ways to alter interest-rate sensitivity.
• Cash bonds use balance sheet and incur financing costs.
• Swaps require legal setup and ongoing margin and counterparty-credit support.
• Internal cost allocations can influence instrument choice even when they differ from actual costs.
• The document gives no quantitative comparison that selects a best instrument.

Tags

# Interest Rate Swap versus Cash Bond


# Interest Rate Swap versus Cash Bond












From the point of view of a leveraged fund manager, what is the benefit of buying a bond when the same could be expressed through an OIS swap? Assuming, of course that the swap is not mispriced i.e. no arb exists between the cash bond and the swap.

I am a buy side money manager and experienced in trading equities and futures but starting out on interest rate swaps.

Thank you.

## Answer by Dimitri Vulis (score 1)

https://quant.stackexchange.com/a/79358

If the goal is to change your interest rate sensitivity, then yet another instrument that some people prefer is rates or bonds futures, or even options.

The choice of rates instruments may depend on how your place of work allocates costs, which sometimes differs a lot from actual costs, and skews the preferences. Bonds are on balance sheet, you may be "charged" too much or too little for that, and for the costs of financing the bond position. But maybe the "charges" have nothing at all to do with your usage, and then you don't care. Likewise, to be able to use derivatives, someone needs to pay for one-time setup (e.g. ISDA agreement etc) and continuous costs (e.g. someone to look after margins and counterparty credit), and the people who benefit from the infrastructure may be paying too much or too little for their access/usage.

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