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Key Financial Market Concepts, 2nd Edition by Bob Steiner

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Cash-and-carry Arbitrage and Implied Repo Rate

Definition

A cash-and-carry arbitrage is the sale of a bond futures contract together with the purchase of a deliverable bond, to lock in a profit.

The implied repo rate for any deliverable bond is the break-even interest rate at which a purchase of that bond must be funded until delivery of the futures contract so that, when combined with a sale of the futures contract, there is no cash-andcarry arbitrage.

How are they used?

Cash-and-carry arbitrage

If the seller of a bond futures contract wishes to hedge his position, he can do so by buying the cheapest-to-deliver (CTD) bond. He might also do these two transactions at the same time deliberately to lock in an arbitrage profit. The opportunity ...

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