This precise operation consists in buying/selling a future contract on a 5-year T-Note and at the same time selling/buying a futures contract on a 10-year T-Bond. In this way, the investors can take advantage of the fluctuations of the interest rate and at same time try to reduce the risk of the futures market, which is typically high.
The futures market is risky because it is characterized by the use of leverage allowing investors to have large margins. However, this leverage can be very dangerous if the signals for the market movements are misunderstood.
One of the most common ways to take advantage of this leverage and reduce the risk is to use spreads (take two offsetting positions in the market). It should, however, be remembered that this type of operation does not always eliminate risk, and can concurrently limit the gain in the same way that it reduces the risk.
|Five Against Note Spread (FAN Spread)|