Curriculum·R401 Derivatives Foundations·about 33 min
Basis, carry, and structure
By the end of this lesson you can
- →Define basis, annualise 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, held a short position in short-dated VIX futures and rebalanced daily to maintain constant inverse exposure. It had about $1.9B of assets on Friday 2 February 2018. On Monday 5 February the VIX rose 115.6 percent, from a close of 17.31 to a close of 37.32. The daily rebalance required the product to buy VIX futures as they rose, into the same move that was harming it. XIV's indicative value fell from $115.55 to $4.22, a loss of about 96.3 percent. Because the intraday indicative value fell to 20 percent or less of the prior day's close, the note's acceleration provision was triggered. Credit Suisse announced termination and the last trading day was 20 February 2018.
- The decision point
- The strategy had worked for years and it worked 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. Nothing was mispriced and nothing broke. The product did exactly what its prospectus described, including the daily rebalance that forced it to buy into the spike and the acceleration clause that ended it, both of which were published before anybody bought a single note.
- Recorded loss
- $1,900,000,000
What you will be able to answer
- →What is basis and what forces it to zero?
- →How do you annualise 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.
It is free. We do not sell the list and there is nothing to buy at the end of it.
Sources and review
- https://www.cnbc.com/2018/02/06/the-obscure-volatility-security-thats-become-the-focus-of-this-sell-off-is-halted-after-an-80-percent-plunge.html
- https://www.etf.com/sections/news/inverse-vix-etn-shuts-down
- https://www.sixfigureinvesting.com/2019/02/what-caused-the-february-5th-2018-volatility-spike-xiv-termination/
- https://www.thestreet.com/markets/credit-suisse-terminates-velocityshares-etn-as-vix-spikes-to-2009-high-14476661
Confidence high·Volatility low·Reviewed 2026-08-07·Owner unassigned
Contested
Reported XIV figures vary slightly by whether closing indicative value, closing market price or intraday values are quoted, with the 96.3 percent loss and the move from $115.55 to $4.22 being indicative values. The $1.9B asset figure is as of the preceding Friday. None of the variation affects the argument.
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.