Choosing Between Receive-Fixed One-Year OIS and Long 10-Year IRF
A proprietary rates desk has a three-month view that the RBI will cut the policy repo rate by 50 bps. The one-year MIBOR-OIS is quoted at 6.60%, the five-year OIS at 6.90%, and the 10-year G-Sec yield is 7.05%. The desk can either receive fixed on a one-year OIS or buy 10-year interest rate futures, which is priced to yield 7.18%. The desk's risk limit is a maximum DV01 of ₹25,000 per basis point, with a hard stop at a 15 bps adverse move in the traded instrument. The fund's funding cost is 6.55%. The head of trading believes the 10-year trade has more convexity and roll-down, but the risk officer notes that the one-year OIS has negligible duration and that the curve is steep. The desk must choose one trade and size it within the DV01 limit.
1. Size each trade within the ₹25,000 per bp DV01 limit and choose one, showing the carry and risk reasoning.
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One-year OIS: DV01 per ₹100 crore is about ₹10,000 per bp because duration is approximately one, so the maximum notional is ₹250 crore for ₹25,000 per bp. 10-year IRF: DV01 is ₹150 per contract, so the maximum is 25,000 ÷ 150 ≈ 167 contracts. Both use the full DV01 limit, but the risks differ. The one-year OIS is a direct bet on the policy path: receiving 6.60% against 6.55% funding gives about 5 bps carry, and a 50 bps repo cut could lower the one-year rate by 30–40 bps. The 10-year futures trade has more term premium, fiscal supply and global-yield risk; a 50 bps repo cut may lower the 10-year yield by only 20–25 bps if the curve steepens. The one-year trade has cleaner correlation with the view. Choose the one-year OIS at ₹250 crore, or a smaller size if the desk wants room before the stop. The 10-year trade is not wrong, but it is a curve and duration trade, not a pure policy-rate trade.
2. Where should the stop be, and what would make you abandon the view?
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With DV01 of ₹25,000 per bp, a 15 bps adverse move is a ₹3.75 lakh loss. For the one-year OIS, the stop is a fixed rate 15 bps above 6.60%, i.e. 6.75%; for the 10-year IRF, the yield stop is 7.18% + 15 bps = 7.33%. Use the traded instrument's yield, not the policy rate, because the market can price a cut that does not arrive. Abandon or reduce the view if CPI inflation surprises above the RBI's tolerance band; if the government's borrowing calendar is larger than expected and pushes up term premia; if US Treasury yields rise sharply and the rupee weakens, constraining easing; if the RBI's commentary shifts from disinflation to financial-stability concerns; or if the curve steepens so much that the one-year rate falls but the 10-year sells off. Do not average down; the stop prevents a small policy-timing error from becoming a large duration loss.