Prediction of CTD bond for India bond future contract; Societe Generale

Abstract

The internship in Societe Generale has helped me in many ways. I worked in the treasury department, learning about the Government Securities market in India. I also got the opportunity to learn about the Interest rate futures market which was launched in India in August 2009. While studying about . the securities market, I learnt about the calculation of the zero rates and forward rates from the existing securities prices. Having got the opportunity to sit in the dealing room, I also learnt about the overnight money borrowing (repo, CBLO and call money), and the accounting practices and the back office work involved in that. While studying about the repo and reverse repo, I also learnt about CCIL - Clearing Corporation of India Limited, the role played by them, and the various platforms used for dealing like - NDS (RBI) : Negotiated Dealing System, NDS OMS : Order matching system, and CCIL CROMS : Clearcorp RepoOMS. I started by learning the specifications of futures contract, the notional bond underlying the interest rate futures contract, the delivery date, the conditions for deliverable bonds, the settlement mechanism, conversion factor" calculation of the invoice price, and the concept of Cheapest to Deliver bond. Cheapest to deliver bond (CTD) is the least expensive bond in the basket of deliverable bonds. Hence the CTD bond will be given by the short investor to . the long investor. The cheapest to deliver bond is identified by calculating the profitsllosses for each of the deliverable bonds and choosing that bond which maximizes the profit (in case there is at least one profit making deliverable bond) or minimizes the loss (in case all deliverable bonds are loss making) on the future . Identifying the CTD bond before the delivery day will " help the trader in deciding the trading strategy in the government securities. So we decided on building an excel sheet model to forecast the CTD on the· delivery date. On the process of developing I got the chance to learn and apply the various models available for short rates forecasting. We.,.developed ~ . and tested 4 models for CTD forecasting.