Managing physical delivery, basis risk, and tails

Chapter 9 offers a detailed examination of the physical delivery process and its central role in linking Treasury futures with the cash market. This chapter explains why physical delivery is crucial for price alignment, describes key statistics about delivery frequency, and sets out the timeline for Intention, Notice, and Delivery days for each contract. It covers how invoice amounts are determined by combining the converted futures price and accrued interest, and explores the embedded options granted to the short position holder, including the choices of timing and quality of delivery. The text analyzes the management of basis risk, calculations of gross and net bases, and the challenges posed by delivery tails that arise when unwinding basis trades. Practical strategies for managing these risks and exposures are discussed throughout the chapter.