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The basis : A new available Grapple !

10 January 2014 by HCM

We are pleased to introduce a new type of Grapple : the basis between the market quoted price of indices and their theoretical value (derived from the prices of their constituents). The basis is expressed in cents (it is the difference of the index fair value cash price and the index quoted cash price), so that it is homogenous between indices and tenors. The basis of the CDX IG9 10Y illustrates how volatile this parameter can be: on the back on systemic risks (right after the default of Lehman at the end of 2008, the discount between theoretical and quoted price was almost 6%); on the back of market technicals (during the seconf half of 2012 when the much talked about “London Whale” was roaming the market, the discount was consistently between 1 and 2%); or even in the quieter market conditions which prevailed in 2013, the basis has been alternatively positive and negative in fairly quick succession.