Thursday, January 27, 2011

FI desk -- how long to hold a FI position

See also post on repo-based automatic financing for treasury trades.

A typical FI trading desk holds cash positions only for a few days, but could hold derivative positions till expiry.

A typical cash bond position ties up much higher capital than equity positions, so even the biggest banks don't have so much working capital to hold many big FI positions for long. Even if a big FI position is profitable, it might take up too much capital so we can't do enough other trades. Holding big positions indefinitely -- is prop trading.

Margin account allows the desk to trade much larger volumes of securities. Common in options, futures, even FX spot, but I don't think it's common for cash bonds.

In this context, most common (and effective) derivative is a fixed-floating IR swap. It doesn't tie up massive capital.

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