'Bor/Bobl synthetic Shatz against Schatz

[Directional]

I was thinking earlier in the week that trading the Euribor curve against the Bobl could be used to create a synthetic shatz trade - was wondering if there might be "arb" opportunities trading a synthetic position against the shatz.

Anyone ever looked into this sort of curve trading before?

 

[wasp]

Nope, you completely lost me after 'trading the....'

 

[TheBramble]

Arb is suggesting the creation of a highly differentiated derivative in the money markets as a vehicle to potentially trading differentials in pricing the underlying. In this case, the underlying is highly differentiated derivative too.

Opportunities for mis-pricings abound as nobody knows what the hell they are.

Seriously thought Arb, it would be useful, and I don't think I'm alone here, for you to pick the bones out of your initial post and do a Money Markets Highly Synthetic Derivatives Arb Trading - 101.

You live in a different world and I'd appreciate understanding a little more about it.

 

[Directional]

lol - I think you pretty much summed it up already Bramble.

In short, the Shatz is a two year bond, the bobl is a five year - Euribor is a three month interest rate, but the Euribor 'curve' is quoted out quarterly for multiple years so the idea i was describing above might involve selling the Euribor 3yrs out against buying the bobl (5yrs) to make a position that would in interest rate terms be similar to a 2yr shatz trade.

Then trading the shatz against the synthetic in a butterfly type arrangement of spread

 

[wasp]

Again, completely lost me after 'In short,....' but it sounds wonderful!

 

[H2O]

lol - I think you pretty much summed it up already Bramble.

In short, the Shatz is a two year bond, the bobl is a five year - Euribor is a three month interest rate, but the Euribor 'curve' is quoted out quarterly for multiple years so the idea i was describing above might involve selling the Euribor 3yrs out against buying the bobl (5yrs) to make a position that would in interest rate terms be similar to a 2yr shatz trade.

Then trading the shatz against the synthetic in a butterfly type arrangement of spread

Different things to consider:

Selling Euribor 3 yrs out: would mean selling jun09 at the moment. This is a 'blue' contract. Have you ever looked at liquidity that far out in the curve. Impossible to do any size unless you are willing to take a directional view.

Second: trading your vehicle (3-5yr out) vs schatz 2 yr out doesn;t really make sense to me if you are looking to be 'hedged' (To me this looks just like schatz(2) bobl(5) bund(10)) which is pretty volatile as well compared to what most Euribor fly traders are looking for. (It;s hard to predict what is going to happen so far out)
I know a lot of people who trade Euribor vs Bobl or schatz, but they are creating an interim vehicle (duration between the existing products) to decrease volatility (= risk)
You are looking to do something different (see 1)

Third: You want to trade schatz vs your vehicle in a fly type arrangement. Can you explain what you had in mind here? (I assume you are talking long vehicle vs short schatz and other way around)
I

 

[Directional]

nice post H2O, very insightful.

You neatly vocalized the main issues with even trying this idea - your point in 1. on liquidity is probably the biggest downside since the outright on blue june is thin with a wide spread on the bid/ask - even if there was the possibility that the synthetic might track the schatz closely enough to make a "spread" worth trading, june 09 would give probably such an inefficient entry as to counter any edge that might be got from a tightly rangebound market differential.

Aside from margins too - I dont think this would comprise an exchange recognized spread and would not qualify for reduced spread margins.

Just to answer your question in 3. - yes, you had assumed right about what I was mulling over.

good post, thanks!

 

[charliechan]

may be talking hot air here, so please do correct me if my understanding isnt quite there....

euribor is a money market product. the others are bond products. although both are obviously primarily driven by the interest rate, the theoretical pricings are different for bonds depending on length to maturity etc, unlike the euribor which is an easily defined value. so its not quite apples and oranges, but apples and tomatoes (both are fruit, but they dont really go together if that makes sense?) from my standpoint. will this matter?

if creating synthetic structures is your bag, you may want to look more at options - locking in your tick with a delta neutral options position v synthetic futures etc.

im sure a clever bloke like you will be able to get your head around options arb : o) theres also liquidity in the interest rate products - but youve got to be more of an opportunist perhaps.

 

[sqky]

Arb,

By mucking about with ratios, maybe reducing bor size and come in the curve a bit more i think you could find good edge in your idea. Over U.S. figures i can imagine you might get some good value from a synthetic spreading machine working orders in say march or jun 08 against the larger volume in the eurex bonds.

 

[RogueTrader888888]

I tried the Schatz and Euribor and it was a disaster. Had the wrong month, wrong spread and little size to trade it.............but wasnt completely my fault.

"Mistakes only exist if one doesnt learn from them"