Need some help with the basics please!

bsadandy1

Newbie
3 0
Good Afternoon all,

I'm new to the forum so firstly thought I would say hi!

I am having a bit of an issue understanding a few bits and bobs - mainly trading terminology. I'm a complete beginner so need some help with the basics! I have done A level economics a while back, but i have a general understanding!

1. Firstly, can somebody explain what this feed means?

UK DMO SOLD 5.00% MAR 2018 GILT; COVER 1.43 TIMES

2. Also, I understand the relationship between interest rates and bond prices, but have been given an example of hedging which I don't quite understand;

A Bank holds some Gov Bonds @ 10 million Euros. Their research tells them that there is a 65% likelihood that interest rates will rise, thus causing Bond prices to drop. The Bank can sell Bobl futures on Eurex; either 100 Bobl contracts (1 Bobl = nominal value of 100,000 Euros) or a percentage of their holdings e.g. 65 Bobl contracts. A month later Interest rates rise and bond prices decrease - the Bank buys back it's futures for a profit which it can offset against the decline in the value of their portfolio of bonds.

- Firstly, which did the Bank do? Sell all it's Bobl contracts or 65%? Because they are selling them at a futures agreement, surely they can only buy them back at the same price? (the price they sold them at may have been lower than the 'at the time value' but that was due to their research and therefore thy bought them back for the same price, not profiting?) Otherwise they may as well have sold them all at the 'at the time price' and then bought them back after they had decreased in value? or is this because there is no guarantee they can get them back? How would a futures contract ensure the bank can buy them back??

Please tell me If i'm completely wrong, and if any which bits are right and wrong!

3. Also, when learning about liquidity this example came up, and don;t get the general jist at all!

The Schatz regularly has 1/2 tick bid or offer prices with 2,000+ contracts on both the bid and offer, average daily volume in the region of 500,000 and open interest of 1,500,000. The long Gilt however will frequently be 2 ticks wide in the bid or offer spread with only 25 to 50 contracts there to trade, a daily volume of 85,000 to 20,000 and open interest of 400,000.

- What is the Long Gilt? What is the Volume referring to?

4. The Exchanges set contract sizes, but what does it mean when;

1 bund = 1 x 100,000 Euros worth of debt??

Sorry to ask such beginners questions, but any help would be appreciated!

Many Thanks,

bsadandy1
 

rsh01

Experienced member
1,184 299
Good Afternoon all,

I'm new to the forum so firstly thought I would say hi!

I am having a bit of an issue understanding a few bits and bobs - mainly trading terminology. I'm a complete beginner so need some help with the basics! I have done A level economics a while back, but i have a general understanding!

1. Firstly, can somebody explain what this feed means?

UK DMO SOLD 5.00% MAR 2018 GILT; COVER 1.43 TIMES
Debt Management office sold UK govt bonds 5% coupon maturing mar 2018; cover is bid to cover - so they wanted to sell £3.75bn (website says 3.75 & 3.375) & got bids for £5.373bn, 1.43 times the amount for sale.

2. Also, I understand the relationship between interest rates and bond prices, but have been given an example of hedging which I don't quite understand;

A Bank holds some Gov Bonds @ 10 million Euros. Their research tells them that there is a 65% likelihood that interest rates will rise, thus causing Bond prices to drop. The Bank can sell Bobl futures on Eurex; either 100 Bobl contracts (1 Bobl = nominal value of 100,000 Euros) or a percentage of their holdings e.g. 65 Bobl contracts. A month later Interest rates rise and bond prices decrease - the Bank buys back it's futures for a profit which it can offset against the decline in the value of their portfolio of bonds.

- Firstly, which did the Bank do? Sell all it's Bobl contracts or 65%? Because they are selling them at a futures agreement, surely they can only buy them back at the same price? (the price they sold them at may have been lower than the 'at the time value' but that was due to their research and therefore thy bought them back for the same price, not profiting?) Otherwise they may as well have sold them all at the 'at the time price' and then bought them back after they had decreased in value? or is this because there is no guarantee they can get them back? How would a futures contract ensure the bank can buy them back??

Please tell me If i'm completely wrong, and if any which bits are right and wrong!

~it doesnt say how many. btw the bank didnt have any futures already - its going short the future ie its selling the future price. when it sells it enters into the futures contract. it can then buy them back to close out the contract.
~you cld assume it wld hedge the full amount of exposure - ie 100 contracts. it either happens or it doesnt, so if they want to hedge the risk, then hedge the full amount. (the 65% chance may have been priced into the future)
~futures price goes up & down - thats the point, you enter (in this case) to hedge against price movements, the underlying value of the future value is the current price (+ some other stuff you dont need to worry about) - which is not static. plenty of free reading material on futures online.
~it would always be able to buy the futures back - the market is v liquid. the exchange provides the means to buy them back - a market. and institutions are paid to provide liquidity in these markets - provide a price to sell & buy them, but there are enough participants wanting to buy/sell anyway.

3. Also, when learning about liquidity this example came up, and don;t get the general jist at all!

The Schatz regularly has 1/2 tick bid or offer prices with 2,000+ contracts on both the bid and offer, average daily volume in the region of 500,000 and open interest of 1,500,000. The long Gilt however will frequently be 2 ticks wide in the bid or offer spread with only 25 to 50 contracts there to trade, a daily volume of 85,000 to 20,000 and open interest of 400,000.

- What is the Long Gilt? What is the Volume referring to?
~30 years i believe.
~assuming its still talking futures, the first amt 2000 for the schatz is the volume which is on the bid & offer at the market price. so if someone wanted to buy 3000 contracts at market it would only be able to buy (up to) 2000 at current market price as thats all that is on the offer. there is another (up to) 2000 more on the offer at the next price up - so it cld buy the remainder 1000 at this price. its basically saying the volumes are much lower for the 30yr bond futures vs the short term futures, its less liquid market. the 2 ticks wide part is saying that the bid is at x, the offer wld normally (for liquid instruments) be x+1(tick) higher. in the long gilt its x+2 ticks higher. so there is one price - the mid price which cannot be bought or sold at market - it neither has bid or offer volume. google bid/offer if you're confused about these terms.
~open interest is Open Interest Definition | Investopedia
i have always referred to it as definition #2 ie with respect to orders.

4. The Exchanges set contract sizes, but what does it mean when;

1 bund = 1 x 100,000 Euros worth of debt??
yep i believe that is the contract size for the bund
(10 year german govt bond)

Sorry to ask such beginners questions, but any help would be appreciated!

Many Thanks,

bsadandy1

sorry i cldnt be bit more eloquent. see red above.

euro bond future contract details are on the eurex exchange site.... Eurex - Glossary

no doubt someone will correct me if i have got anything wrong.
 
 
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