Gilt forwards/futures - Question

[pratti]

This might be a rudimentary question, but I am trying to understand how Gilt forwards are priced and how does the repo market come into play into the pricing.

Example.

Bond: Gilt 3.750% 7 Sep 2019
The spot price (T+1) for the Gilt 3.750% 7 Sep 2019 is 98.90
The forward price (T+7) is 98.82

BBA £ Libor Rate for 1 week is 0.55156 and the BBA 1-week repo rate is 0.505.

I am trying to understand the rationale and the calculation behind the (T+7) price of 98.82.

Are gilt forwards always less than the spot price?

 

[Martinghoul]

Not always... Just think about the logic behind buying the bond fwd vs buying it spot.

 

[scose-no-doubt]

Something to do with discounting and/on interest foregone?

 

[Martinghoul]

Yep... So, basically, you should be indifferent, in terms of choosing to buy bond spot and holding it till the fwd date and buying the bond out of the fwd date. Which means that you just need to calculate how much you're paying/recving to own the bond between the spot and fwd dates. If you're long the bond, that will be equal to the coupon you receive on the notional amount less the repo interest/financing you pay on the all-in amount.

 

[scose-no-doubt]

How is fx risk priced in?

 

[Martinghoul]

It isn't... Why should it be? Everything you do is denominated in GBP. If you want to hedge the FX aspect of the trade, however small it might be, you can do that completely separately of the bond trade.