Best Thread STIR's from Scratch

There are massive opportunities in trading the asset swap spread, but I reckon we got to wait and see how far BoE cuts rates. CTD for March gilt contract way too cheap, buy it
 
MrGecko said:
Arbitrage opportunities?

Granted, thin markets are exaccerbating movements, but unless you are talking about using different convexity adjustments I can't see where the arb is...

... please elaborate?
Click to expand...

Sorry I didnt answer your question. Short sterling futures contracts are basically contracts used to speculate on 3 month libor rates at expiry of the short sterling contract. So a Dec09 short sterling contract is used to speculate on 3 month libor at the end of December. So if it is September 2009, I can compare the implied 3 month libor rate on the Dec09 short sterling futures contract (100-futures price) with the 3v6 FRA rate. There should not be any difference in the rates, if there is, you have arbitrage, because a 3v6 FRA is essentially a 3month borrowing 3 months from now.
 
Sure... I think what gecko was getting at is the FRAs always seem to be being priced off short sterling in any case... or at least that's what I've seen when I looked at it.

That was before short sterling broke as a market mind ;)
 
Yea your right, but the occasion when there is a disparity, it is riskless profit, so why not take it. However, it is extremely difficult, almost impossible to do this as a trader sitting at home as you have the actual traders in the city who can do these trades very fast, with low costs and tight spreads and so can take advantage of differences of even 2-3 basis points
 
Well these 'city traders' should find something better to do with their time, my Reuters 3000 xtra installation comes with a sample excel sheet to look out for these 'opportunities' ffs!
 
sure - for the arb to work to two rates need to be fungible; as the two are priced off one another (let us exclude swaps for arguments sake) then the only opportunity for arbing would be if the STIR -> FRA convexity adjustment is anything other than the FRA -> STIR convexity adjustment...

... of course, if someone is going to buy the sh!t out of a STIR contract (or Pack, spread, whatever), then there is a remote possibility that the FRA's will take long enough to catch up that there might be a trade there - but I suspect this would be eaten up by computers far too quickly.

Don't doubt that its possible, but the crux of my position is that the arb should be due to some differences in the implied adjustments or similar; and still I think computers would get at the trade too quickly.

** afterthought ** are you talking about pure arb? becuse I can imagine it is possible to do if you are prepared to accept some risk - after all, a STIR for 98.00 isn't the same as an FRA for 98.00 (this is what I'm getting at w.r.t. fungibility).
 
tripleogstar said:
So if it is September 2009, I can compare the implied 3 month libor rate on the Dec09 short sterling futures contract (100-futures price) with the 3v6 FRA rate. There should not be any difference in the rates, if there is, you have arbitrage, because a 3v6 FRA is essentially a 3month borrowing 3 months from now.
Click to expand...

There should be a difference in the rates, because the cash flows are not the same.
 
Arabianights, if you can afford to have reuters installed, you have to be make over 4-5k a year from trading. Are you trading from home?
 
I'm doing alright thanks :)

Sometimes I trade from home but more often from an office. Actually i don't think you'll find any retail traders in threads about STIRs on this site... There are plenty of locals here and at least a couple of IB and recognisable market making firm traders here...
 
the cash flows aren't the same because:

i) Futures are settled at T(1), while forwards are settled at T(2)

ii) Futures are settled daily throughout the life of the contract, forwards are not.

if you're tallking about 3m contracts, the difference is negligible, but anything over 2yrs and it starts to add up (ii has a much greater impact than i). As a concequence, forward rates are usually a little less than futures rates, by an amount known as a convexity adjustment (think about it like the gamma of a delta contract; convexity is the "gamma of duration").

In order to adjust the futures rate by the right amount, you need to model the short rate - which is where I'm coming from when I say the arb is due to differences in convexity adjustments - different models of the short rate will lead to different convexity adjustments.

it's explained here ( http://www.rotman.utoronto.ca/~hull/TechnicalNotes/TechnicalNote1.pdf ) but I had a quick look and there are too many symbols for a sunday (and I'm not sure I could explain it anyways).

How exactly are you trading these...??? Are you taking reverse positions and holding until settlement? Or are you trading the spread and treating it as mean reverting (i.e. not pure arb)?

And if you don't mind me asking, who are you trading FRA's through?
 
And on a related note good luck persuading LCH to let you fully offset the sterling versus the FRA ;)

Reminds me the aforementioned spreadsheet allows for a custom convexity adjustment if so desired...

There is one cunning thing you could do with this strategy but it would only work if they are quoting size in the FRA and you could only do it a couple of times... Also have to guess at their book and risk parameters... Take the equivilant of fifteen thousand lots in the FRA and offer them a hedge in short sterling a few ticks away... With that market as it is at the moment they'll have to take it!
 
MrGecko said:
the cash flows aren't the same because:

i) Futures are settled at T(1), while forwards are settled at T(2)

ii) Futures are settled daily throughout the life of the contract, forwards are not.

if you're tallking about 3m contracts, the difference is negligible, but anything over 2yrs and it starts to add up (ii has a much greater impact than i). As a concequence, forward rates are usually a little less than futures rates, by an amount known as a convexity adjustment (think about it like the gamma of a delta contract; convexity is the "gamma of duration").

In order to adjust the futures rate by the right amount, you need to model the short rate - which is where I'm coming from when I say the arb is due to differences in convexity adjustments - different models of the short rate will lead to different convexity adjustments.

it's explained here ( http://www.rotman.utoronto.ca/~hull/TechnicalNotes/TechnicalNote1.pdf ) but I had a quick look and there are too many symbols for a sunday (and I'm not sure I could explain it anyways).

How exactly are you trading these...??? Are you taking reverse positions and holding until settlement? Or are you trading the spread and treating it as mean reverting (i.e. not pure arb)?

And if you don't mind me asking, who are you trading FRA's through?
Click to expand...

Cheers for that Gecko, I understand what your saying now. I am trading the spread, I am relying on disparity in convexity adjustments to exploit the difference in price. To be honest with you, I was working on the rates desk at a UK IB, and had used models from there to help me trade the FRA-sterling, before i was made redundant. Therefore it is short term play because of the lack of resources I have at home.
 
Hi All, this is my first post on T2W so please bare with me.

I've just started learning about the Euribor market and I would like to know whether it is possible to get started with capital of around £5,000...

I've been thinking about doing the Trader Training course with Global Trading Community. I know that they specialise in Fixed Income and they get you started off with Bonds. Obviously this is a high cost (£4,000 online or £5,000 in house) option but I also understand that the fees for trading once you go live (50 cents a round trip) are some of the cheapest around...

I am wondering whether there are any better alternatives for learning how to trade professionally in this market with a small amount of capital. I'm interested in STIR futures because of the apparent opportunities to make a profit on very low risk trades. I know that I would need to paper trade for a while before trading real money and I'd plan to spend a few months developing my strategy. I appreciate that low risk usually implies low return and therefore you would normally need a large amount of capital to make a decent return but when I'd be ready to go live, will it be possible to get started with around £5,000?

I'm just looking for advice from some experienced people who could possibly point me in the right direction.
 
I would recommend the 'Eurodollar Futures and Options Handbook' by Burghardt for a VERY good in-depth discussion of the futures convexity adjustments and all the related subjects.
 
How is it possible that there are 100's if not over 1k prop traders in the UK trading STIRS and yet this thread receives no interest?
 
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