Hedging treasuries with futures rather than with treasuries?
Why would a trader who wants to hedge against interest rate moves do so in futures rather than underlying treasuries? Similarly, why would a speculator do the same (i.e. how is it any different for a speculator)?
Is it just because they provide the exposure with greater liquidity and not have to worry about squeezes and related spot market effects? Thanks
greater liquidity and cheaper to enter
Greater liquidity, as mentioned above... Less idiosyncratic risk, no repo issues, no balance sheet usage, potentially more leverage (depending on repo haircuts), etc.
Some people really like variation margin, spices up their day
dont need a broker for overnight trades....depends who you are, may not have access to hours outside NY....trade futures electronically
Isn't it costlier to short any cash bond than to use a derivative like CDS or futures to achieve the same goal? That was my understanding at least.
Way cheaper to use derivs.
Define "cheaper" and "costlier".
If it's a matter of transaction costs (i.e. liquidity), no, it's not necessarily "cheaper" to use derivatives, although it could be. If it's a matter of capital usage, it might be cheaper, but it depends on your specific arrangements.
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