Gilt-Edged Market

Example 7.3: The implied repo rate

Another way of looking at the concept of the cheapest-to-deliver bond is in terms of the

implied repo rate. The CTD bond is the bond that gives the highest implied repo rate

(IRR) to the short from a cash-and-carry trade, that is a strategy of buying the bond

(with borrowed funds) in the cash market and selling it forward into the futures market.

The bond is funded in the repo market, and by selling it forward the trade is in effect a

repo with the futures market, hence implied repo rate.

To illustrate, we calculate the IRR for the 9% Treasury 2008, a UK gilt, at the time that the

``front month'' contract was the