Series 3: Implied Repo Rate And Basis Risk

Taken from our Series 3 Implied Repo Rate and Basis Risk

When a 90-day T-bill is being hedged with a T-bill futures contract, the futures contract’s basis is equal to the carrying cost. However, with T-bill futures, the product being hedged is frequently different from a deliverable T-bill. As a result, basis may often be quite different from the cost of carry. Basis risk in interest rate futures, the difference between a contract’s basis and its cost of carry, has two sources:

  1. 1. Standardized delivery dates do not usually coincide with transaction dates. T-bills are issued weekly and mature in 28, 91, or 182 days, while T-bill futures always mature in 90 to 92 days (13 weeks) and have a 3-day settlement window only 4 times per year.
  2. 2. The underlying product frequently differs from that of the contract. Not only does a one-month T-bill settle on a different date than a T-bill futures contract, but investors often used T-bill futures to hedge a commercial bank loan or some other interest-bearing product.

To calculate the basis of a T-bill futures contract, one must find the implied repo rate. The implied repo rate is the simultaneous sale (or purchase) of a futures contract divided by the purchase (or sale) of the underlying security at its current cash price. The rate is then adjusted to connect it to an annual rate of return. Annualizing the implied repo rate enables it to be compared directly to the contract’s cost of carry (repo rate).


This formula measures the interest rate at which the returns from a futures contract just equal the cost of financing it. In this respect, it may be seen as a breakeven repo rate.

Days to maturity in the formula refers to the maturity of the futures contract. It does not refer to the maturity of the deliverable security, which will expire 13 weeks later. During the three-day

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