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B

Back months

The futures or options on futures months being traded that are furthest from expiration.

 

Basis

The difference between the underlying product price and the futures price.

 

Basis point (bp)

A change in the interest rate of 1/100 of 1%. Therefore, one basis point (1 bp) is equivalent to 0.01%.

 

Basis trading (cash and carry trade)

An arbitrage position typically comprising a long cash position together with a short position in its respective futures contract, whereby the cash price plus the cost of carry of the underlying position is lower than the futures price. Arbitrageurs will therefore buy cash and 'carry' to the futures date for delivery into the futures contract. It is assumed that the cash position is financed in the overnight repo market. By convention, buying the basis is to buy cash bonds and sell futures, and selling the basis is to sell cash bonds and buy futures.

 

Basis Trading Facility (BTF)

The BTF enables the futures leg of a basis trade to be transacted without execution risk. See Basis trading.

 

Bear strategies

Strategies based on the belief that prices will fall.

 

Benchmark bond

The most recently issued and most liquid government bond.

 

Bid price

The price at which a trader or market maker is willing to buy an instrument.

 

Black-Scholes model

Developed by Fischer Black & Myron Scholes in 1973, it is the classic modern options pricing model for the valuation of European-style options.

 

Bond

A certificate of debt, generally long term, under the terms of which an issuer contracts, amongst other things, to pay the holder a fixed principal amount on a stated future date and, usually, a series of interest payments during its life.

 

Bond 'stripping'

Separate Trading of Registered Interest and Principal of Securities, i.e. securities which are split and divided into interest only securities and principal only securities to suit the differing need of investors.

 

Broker

A person or firm that acts on another's behalf.

 

Bucketing

Interest rate risk management which matches interest rate exposure of future inflows and outflows, with offsetting interest rate exposure at pre-determined future dates.

 

Bull strategies

A strategy based on the belief that prices will rise.

 

Bundesanleihen (Bund) future

Futures contract based on notional German Government bond with a 4% coupon and eight and a half to ten and a half year maturity.

 

Buoni del Tesoro Poliennali (BTP) future

Futures contract based on notional Italian Government Bond with a 6% coupon and eight to ten and a half year maturity.

 

Butterfly

An option strategy involving the purchase of one put (or call), the sale of two puts (or calls) at a higher exercise price, and purchasing one put (or call) at an equally higher price.