Alternative methods of weighting

It is generally considered that capitalization weighted indices give the most accurat indication of the collective movement in corporate asset or liability prices. However two alternative methods of weighting the constituents of equity indices are fowl^,‘equally weighted‘ and ‘price weighted‘. In the case of equally weighted indices, a’ equal amount of money is assumed to be invested in each security in the index Changes in the index thus represent changes in the value of the portfolio. Pri weighted indices reflect the average price of the securities in the index and Chang: in the index represent the average price change of the securities in the index. The Dow—Jones and the Major Market Index of the American Stock Exchange (MMI) a. both of the price weighted form. The FT 30 is a geometric average equally weight index. Only the Major Market Index has a futures contract based upon it. Read more »

Posted: June 28th, 2008 under Commodities Futures, Foreign Exchange Futures, Future Management, Futures Contracts, Futures Trading System, Managed Futures, Short Futures, Stock Futures, investment.
Comments: 5

A US investor has purchased Sterling Treasury bills and wishes to hedge against the falling value of Sterling. Buying the out-of-the-money put (strike price $1.8500) will protect against a fall below that figure. The sale of the out-of-the-money call at $1.8900 will mean that the investor will benefit from any rise in Sterling to $1.8900 but not above that figure. The cost of buying the put is off-set by the revenue from writing the call, resulting in this instance in a zero cost strategy.

The reader will note that if Sterling rises above $1.8900, the written call position will make a loss. This is off-set by the rising value in dollar terms of the underlying Sterling investment. Conversely, if Sterling falls below $1.8850, the puts make a profit which off-sets the currency losses on the investment in the Sterling Treasury bills. Read more »

Posted: June 22nd, 2008 under Commodities Futures, Currency Futures, Equity Futures, Future Fund, Futures Contracts, Futures Options, Futures Spreads, Futures Trader, Futures Trading System, Managed Futures, S&P Futures.
Comments: 4

This section explains two of the many uses of options that rely upon the ability of the option buyer to abandon the option at no extra cost. The first is the purchase of options to insure against a fall in the value of a currency. The second is the hedging of the currency risk in a foreign currency tender.

Purchasing options as a form of insurance

If a US investment manager has strong expectations of a rise in the value of Sterling but wishes to insure against being totally wrong, slightly out-of-the money puts will provide the required insurance. Read more »

Posted: June 21st, 2008 under Commodities Futures, Equity Futures, Foreign Exchange Futures, Future Fund, Future Investing, Futures Options, Futures Prices, Futures Spreads, Futures Trading System, Managed Futures, Stock Futures, Stock Market Futures.
Comments: 5

Currency swaps, which were developed before interest rate swaps, were derivations of the 1970s practice of establishing parallel loans between two parties whereby, for example, company A would lend its domestic currency to company B, in return for a loan of company B’s domestic currency. These parallel loans were often used to manage exchange risk or to circumvent exchange control regulations.

This system of mutual lending had two serious drawbacks. First, there was no automatic off-set of the cash flows between parties. Thus, if company A defaulted on its loan from B, company B would still have to honour its commitment to A. Secondly, although the two loans effectively cancelled each other out, they were still shown on the balance sheets of each company. Read more »

Posted: June 14th, 2008 under Commodities Futures, Crude Oil Futures, Equity Futures, Future Exchange, Future Fund, Future Investing, Future Management, Future Trading, Futures Contracts, Managed Futures, Swap Futures.
Comments: 2

Another new area of the swaps market is that of commodity swaps. The mechanics of these swaps are similar to interest rate swaps, in that the swap establishes a fixed commodity price and a floating commodity index, with which the fixed price can be compared. There is a notional principal physical quantity of the commodity which establishes the value of the periodic cash flows. To illustrate these mechanics and give some insight into the use of commodity swaps as risk management instruments, consider the following scenario regarding a manufacturer that is a substantial consumer of copper. Read more »

Posted: June 9th, 2008 under Commodities Futures, Future Broker, Future Exchange, Future Fund, Future Investing, Future Management, Future Trading, Futures Contracts, Futures Quotes, Futures Trader, Managed Futures, Swap Futures.
Comments: 2

Concern

The size of the markets can work against foreign investors in two ways. First, some securities and some countries may be illiquid. In such markets, any reasonably sized trades are sufficient to move the price. The price rises when one wants to buy and falls upon a sale. This is particularly painful because most foreign investors end up selling and buying around the same time.

The second concern with market size is inefficiency. Emerging markets are known to be inefficient, and prices can take several days to fully reflect new information. As a passive investor, you can lose money to more sophisticated investors who trade on the basis of the inefficiency. Read more »

Posted: February 14th, 2008 under Commodities Futures, Future Investing, Future Management.
Comments: 3

Use of Derivatives by Investment Companies

As long as ICs comply with SEC regulations concerning asset coverage, there are no significant restrictions on their use of derivatives. However, an IC which uses derivatives more than just as a hedging strategy potentially faces the need to register with the CFTC as a CPO and may be required to comply with two different regulatory regimes.

Where an IC is registered with the SEC, its operator is not required to register with the CFTC as a CPO, if the IC enters into transactions in CFTC regulated derivatives for bona fide hedging purposes.

This exemption is dependent on the IC complying with the following conditions:

1. it commits no more than 5 per cent of its total net assets to initial margin and option premiums;

Read more »

Posted: February 9th, 2008 under Commodities Futures, Future Broker.
Comments: 4

CTA Regulation

Anyone whose business involves advising US citizens or residents on trading in CFTC-regulated contracts or who trades such contracts on a discretionary basis is required to register with the CFTC as a CTA and to become a member of the NFA. CTAs who have advised fewer than 15 people in the previous 12 months are exempt from registration if they do not publicly present themselves as CTAs.

The CFTC takes the view that if a CTA advises a fund, it advises each investor who participates in the fund and the CFTC counts each investor for purposes of its 15-person limit. If advice is only given in relation to pools for which a CPO is registered or exempt, the CFTC exempts it from the obligation to register as a CTA. CTAs must comply with CFTC and NFA membership application procedures and provide disclosure documents before soliciting clients. Read more »

Posted: February 9th, 2008 under Commodities Futures, Future Fund, Future Management.
Comments: 3

THE UNITED STATES

The legislation for setting up and marketing managed futures funds in the US is incorporated in regulations from the Securities and Exchange Commission (the SEC), the Commodity Futures Trading Commission (the CFTC), and the securities (blue sky) laws of the 50 states.

Interests in funds are ‘securities‘ under the Securities Act of 1933 and may only be offered or sold to the US general public in compliance with SEC rules. In addition, the organisers and advisers of derivative funds are generally required to register with the CFTC as commodity pool operators (CEOs) or commodity trading advisers (CTAs).

Funds whose principal activity is investing in equities and government securities must in most cases register with the SEC as investment companies (ICs) under the Investment Company Act of 1940 and their advisers are required to register with the SEC as investment advisers (IAs) under the Investment Advisers Act of 1940. Read more »

Posted: February 9th, 2008 under Commodities Futures, Future Fund, Future Trading.
Comments: 2

Perhaps no other part of the financial marketplace has received as much scrutiny as the futures market. Unlike other markets, where tangible items change hands (stock certificates, diamonds, real estate, and so on), the participants in the futures market deal in promises. A trader can buy or sell thousands of bushels of wheat or tons of soybean meal and have absolutely no intention of ever growing the commodity or taking delivery of it. In fact, fewer than 2 percent of the commodities underlying all futures contracts are ever actually delivered. Read more »

Posted: February 1st, 2008 under Commodities Futures, Futures Contracts, Futures Market, Futures Prices, Gold Futures.
Comments: 2