Curriculum·R401 Derivatives Foundations·about 34 min

Basis, carry, and structure

By the end of this lesson you can

→Define basis, annualize it, and state what forces it to zero
→Construct a cash and carry trade and name the leg that actually fails
→Compute what a single reversal does to years of accumulated carry
→Identify a mechanical rebalance and explain why it trades against its own holders

Senior · enrolled learners

This lesson opens with XIV and the volatility spike, 5 February 2018.

What happened: The VelocityShares Daily Inverse VIX Short-Term ETN, ticker XIV, was a Credit Suisse note paying the inverse of the daily return of the S&P 500 VIX Short-Term Futures Index, an index of short-dated VIX futures, so its exposure reset every day. Its market capitalization had reached about $1.9B in the days before the event. On Monday 5 February 2018 the VIX closed at 37.32 against 17.31 on the Friday, a rise of 115.6 percent. Keeping a daily inverse exposure hedged through a rise like that means buying VIX futures as they go up, into the same move that is harming the note, and the investors' complaint, as the Second Circuit summarized it, alleges that Credit Suisse bought more than 105,000 VIX futures contracts within 15 minutes of the close, about a quarter of the market. XIV's indicative value fell from a prior closing value of $108.37 to $4.22, a loss of about 96.1 percent. Because the intraday indicative value fell to 20 percent or less of the prior day's closing indicative value, an Acceleration Event occurred, which gave Credit Suisse the right to redeem every note. It announced the acceleration on 6 February with the last day of trading set for 20 February; on 14 February it said Nasdaq would instead suspend trading after the close on 15 February, the accelerated valuation date, and on 21 February it paid $5.99 a note, the closing indicative value on 15 February, for about $1.8B of investor losses as the court summarized the complaint.
The decision point: The lesson's reading: the strategy worked for years for the same reason it failed. Selling volatility collects a small, steady premium because most days are calm, and the position that collects it is short the rare event. The offering documents described the daily reset, warned that the issuer's hedging could affect the index and could profit it while the notes fell, and spelled out the acceleration that ended the note, all before anybody bought one. That reading is contested. Investors sued, alleging that Credit Suisse's own hedging engineered the collapse and that the published intraday value froze for about an hour that evening while they bought more than $700M of notes. The district court dismissed in 2019; in April 2021 the Second Circuit held that the alleged conduct, if proven at trial, was manipulative and revived those claims. We have found no final judgment on them.
Recorded loss: $1,800,000,000

What you will be able to answer

→What is basis and what forces it to zero?
→How do you annualize basis?
→Which leg of a cash and carry fails?
→What does one reversal cost?

Orientation and Year One are open: anyone can read them without an account. From Year Two onward the lessons are for enrolled learners, because progress through the later years only means anything if it is tracked against a record.

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Terms used here

Liquidation Leverage

Sources and review

Confidence high·Volatility low·Reviewed 2026-10-22·Owner unassigned

Contested

Reported XIV figures vary by whether closing indicative value, closing market price or intraday values are quoted. This lesson uses the indicative values in the Second Circuit's opinion in Set Capital v. Credit Suisse (27 April 2021): $108.37 at the start of 5 February's trading and $4.22 after the fall, a fall of about 96.1 percent. ETF.com reported a fall from $115.55 on the Friday to $4.22 and a loss of 96.3 percent, without explaining the difference from the indicative value. CNBC reported $1.9B in assets and the court a market capitalization of about $1.9B during 29 January to 5 February; the $1.8B of investor losses is the court's summary of the complaint. The 105,000 contracts, the quarter of the market, the hour-long frozen intraday value and the $700M bought during it are allegations as the court summarized them at the pleading stage, not findings. The VIX closes are Cboe's. Credit Suisse's 6 February release, as quoted by CNBC and TheStreet, set 20 February as the last trading day; its 14 February release moved that to 15 February, when Nasdaq suspended trading after the close (https://www.sec.gov/Archives/edgar/data/1053092/000095010318002069/dp86855_ex9901.htm). None of the variation affects the argument.

The lesson's reading that the note did what its documents described is not the only account. The plaintiffs in Set Capital v. Credit Suisse allege the collapse was engineered through Credit Suisse's hedging. The district court dismissed in September 2019; the Second Circuit affirmed in part and vacated in part in April 2021, reinstating the manipulative scheme claims, and held that if proven the conduct was manipulative. We have found no final judgment, and plaintiffs' counsel describes the case as still active in the Southern District of New York.

The five-year carry illustration in part three uses a stated 1 percent monthly gain over 60 months and is not a description of XIV's actual return path, which was both larger and less regular. It is there to show what a single reversal does to a compounding series, and the shape holds at any plausible monthly figure.

S206-02 and S212-01 own the Grayscale discount as a closed-end pricing case. This lesson owns basis on dated futures and the structure of carry products. Keep the split and do not re-derive the redemption argument here.

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