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Paul North – Advanced Futures & Forwards – CFI Education

Advanced Futures & Forwards
Explore the importance of basis, hedging, and how to trade futures and forwards in this advanced course to build your mastery of Capital Markets derivatives.

• Discover what factors influence futures and forwards
• Learn how to hedge exposures by precisely deploying derivatives
• Study how to identify mispricings in cash versus futures markets

Overview

Advanced Futures & Forwards Course Overview
This Advanced Futures & Forwards course teaches the importance of basis, hedging, and trading with futures and forwards. You will learn about the factors influencing basis, as well as various components of bond futures including cheapest-to-deliver (CTD) bonds, repos vs. reverse repos, and how to calculate implied repo rates. You will also learn how to hedge CTD and non-CTD bonds, and how to adjust duration using futures. After completing this course, you will have a better understanding of LIBOR alternatives (ESTR, SOFR, SONIA, etc.), exchange delivery settlement price (EDSP), and spread (basis) trading with futures.

Modules explored:

• Futures & Forwards Pricing – Review
• Understanding Basis
• Bond Futures – Basis Risk
• Futures Hedge – Basis Risk
• Refining the Hedge
• Spread (Basis) Trading With Futures

Advanced Futures & Forwards Learning Objectives

Upon completing this course, you will be able to:

• Explain basis and factors which influence it
• Identify basis risk within futures and bonds
• Calculate implied repo rates
• Determine how to hedge CTD and non-CTD bonds
• Interpret LIBOR alternatives (ESTR, SOFR, SONIA, etc.)

Who Should Take This Course?

This Advanced Futures & Forwards course is ideal for any student or professional interested in gaining a better understanding of the futures and forwards markets. Whether you are interested in derivatives or not, this course provides the key learning objectives required to become familiar with these complex tools.

What you’ll learn

Course Introduction

Futures & Forwards Pricing – Review

Generic Futures Contract
Cost of Carry
Contango and Backwardation Markets
Interactive Exercise 1

Understanding Basis

Understanding Basis
Basis Overview
Basis and Hedge Outcome – Scenario 1
Basis and Hedge Outcome – Scenario 2 and 3
Basis and Hedge Outcome – Change in Basis
Factors Influencing Basis
Natural Long Example
Storage and Basis
Storage and Basis – Example
Quoting Basis
Quoting Basis Example
Interactive Exercise 2

Bond Futures – Basis Risk

Bond Futures Introduction
Bond Futures Example
Bond Price Factor
Cheapest-To-Deliver Bond
Repo vs. Reverse Repo
Repo vs. Reverse Repo Trade
Return on Cash and Carry
Calculate Implied Reverse Repo
Calculate Implied Reverse Repo – Solution
Implied Reverse Repo Exercise
Cash and Carry Arbitrage
Net Basis
Net Carry
Net Basis – Example
Net Basis Exercise
Net Basis – Example Continued
Cash and Carry Summary
Reverse Cash and Carry Summary

Futures Hedge – Basis Risk

Futures Hedge Introduction
Simple Hedge Ratio
Basis Point Value (BPV)
Basis Point Value Historical Observation
Basis Point Value Exercise
Hedging the CTD
Hedging the CTD Continued

Refining the Hedge

Refining the Hedge Introduction
Hedging the CTD – Example
Hedging the CTD – Solution 1
Hedging the CTD – Solution 2
Hedging the CTD Exercise
Hedging Non-CTD Bonds
Hedging Non-CTD Bonds Continued
Hedging Non-CTD Bonds – Example
Hedging Non-CTD Bonds Exercise
Risks in Hedging Non-CTD Bonds
Hedge Efficiency
Calculation of Portfolio Duration
Calculation of Portfolio Duration Continued
Duration Adjustment With Futures
Duration Adjustment With Futures – Example
Duration Adjustment Exercise
Simple Hedge Ratio – Beta Example
Tactical Asset Allocation – Question
Tactical Asset Allocation – Answer
Hedge Ratio – Question
Hedge Ratio – Answer

Libor Alternatives and Other Hedging Strategies

Libor Alternatives
Spot Rates vs. Forward Rates
ESTR Spot Rate
ESTR Overview
One-Month ESTR Contract – Example
Exchange Delivery Settlement Price (EDSP)
ESTR One-Month Period
ESTR EDSP
EDSP Formula
EDSP Calculation
ESTR EDSP Expanded
EDSP Calculation Continued
EDSP Exercise
Market Risk
Concept of Hedging
Long Hedge
Tails and Stubs
Tail Hedge Example
Stub Hedge Example
Stub Hedge Example Continued
Odd Month Hedge Overview
Odd Month Hedge Example
Odd Month Hedge Example Continued
Hedging Within a Month

Spread (Basis) Trading With Futures

Spread (Basis) Trading Introduction
Trading With Futures – Spread or Basis
Trading the Switch – Spread Narrowing
Trading the Spread Outcome
Course Summary

Qualified Assessment

Qualified Assessment

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