Any position capturing the difference between a derivative and its underlying, or between two closely related instruments, financed so that only the convergence matters.
The treasury basis trade is the largest current example: buying cash treasuries funded in repurchase-agreement markets and selling the corresponding futures, earning a few basis points multiplied by leverage of fifty times or more.
The arithmetic explains the risk. A spread of five basis points is worth having only at extreme leverage, and at that leverage a small adverse move or a rise in margin requirements forces liquidation. Regulators have repeatedly flagged the trade as a channel through which a treasury market shock could amplify, as briefly occurred in March 2020.
The general lesson applies to every basis position: the spread is small and reliable, the financing is large and not, and the exit is crowded. See cash-and-carry-arbitrage and haircut.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.The bid-ask spread. Buy orders sit below, sell orders above, and the gap between the best bid (50.01) and best ask (50.04) is the spread you pay to cross. Bar length shows the size resting at each price.
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