Gilts contract

The average volume in gilt contracts over the period 1983-1985 was 663,829. In 1986 volume rose to 2.6 million contracts and settled down to an annual average of approximately 5.6 million between 1987-1991. A second surge in interest in the contract saw trading hit a peak of 19.6 million contracts in 1997, however, from 1998 onwards interest in the contract has slumped to late 1980s levels with annual average of 6.8 million contracts between 1998 and 2001. 

The repo market in linkers coexists alongside an old-style stocklending system. Issues seldom stray far from general collateral rates. Index-linked gilts are not strippable, and there is no index-linked futures contract. There is a sterling inflation derivatives market, which... 

In certain circumstances a specific issue will go tight in the repo market, meaning that it is difficult to borrow the stock for delivery into short sales. This is typically reflected in the stock going special in the repo market. On rare occasions the stock may become undeliverable, leading to failed transactions and also failure to deliver into the equivalent gilt futures contract. When this happens the DMO may make the stock available for borrowing, out of official portfolios, or issue a small amount of the stock into the market. 

There are a range of users of gilt futures contracts. These include ... 

The popularity and liquidity of the gilt futures contract led to the listing of gilt options on LIFFE in March 1986. Average daily volume in this contract was more than 16,000 lots during 2002. The contract is an... 

The Bund future was launched on 29 September 1988. With the introduction of the German government bond futures contract LIFFE was now trading bond contracts in the US Treasury bond, the Japanese government bond, the Italian government bond and UK gilts. It was the first financial futures exchange to have achieved this position. The contract specifications on the UK and European bond futures offered at that time appear in Exhibit 16.1. 

Of course, these contracts have evolved to reflect new political and economic regimes. Today the Bund has become the Euro-Bund, denominated in euros, and traded on Eurex and LIFFE CONNECT platform. The UK gilt has been decimalised and the open outcry system of trading has been replaced by LIFFE CONNECT. While the Italian bond, now also quoted in euros, is traded solely on the Italian Exchange. 

LIFFE s Bund future was a story of success. Eollowing its release, this contract powered ahead of the volnme in gilt trading in its first full year of trading. Exhibit 16.2 illustrates this point and the tremendons interest in the Bund contract compared to the gilt at least np nntil the end of 1997. 

The contract specification of the Euro-Bund bond future introduces a concept of a notional bond. This is also true for all other bond futures contracts. For example, in the case of the UK gilt, the description of the futures contract bond is a 10-year gilt with a 7% coupon for the Euro-Bund future it is a 10-year German government bond with a 6% coupon the Spanish bond (bonos) future is a Spanish Government bond with a 4% coupon, and so on. 

In other words the 7% gilt, the 6% Bund, and the 4% bonos around which the futures contracts are constructed do not exist. A cash market bond that can be delivered into the contract on maturity has to be identified and converted to match the futures contract specification. In full exchange-based contract specifications, the list of deliverable cash market bonds are well defined and are restrictive. Deliverable bonds in the case of the Bund future will be bonds issued by the Federal Government of Germany and will have a maturity between 8.5 and 10.5 years. Normally, bonds offering early redemption, floating coupons, or some form of convertibility will not be in the list of deliverables. 

Options are traded both on recognized exchanges and over the counter (OTC). Exchange-traded options are standardized plain vanilla contracts OTC options can take on virtually any form. Options traded on an exchange are often written on futures contracts. For example, a gilt option... 

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