The Basis and Implied Repo Rate

This section introduces some terms used in the futures markets. The first is basis the difference between the price of a futures contract and the current underlying spot price. The size of the basis is a function of issues such as cost of carry, the net cost of holding the underlying asset from 

CASE STUDY CBOT September 2003 U.S. Long Bond Futures 

FIGURE 6.5 Bloomberg Screen Shows the Cheapest to Deliver for September 2003 U.S. Long Bond Futures Contract  

For bond futures, the gross basis represents the cost of carry associated with the notional hond from the present to the delivery date. Its size is given by equation (6.7). 

The conversion factor equalizes each deliverable bond to the futures price. The bond with the lowest gross basis is known as the cheapest to deliver. 

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