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

Term structure based option-pricing models

Term structure models of pricing contingent claims have followed one of two approaches. One approach followed by Cox, Ingersoll and Ross (1985) actually model the expected returns from movements in the term structure in order to price the contingent claims. In effect, the term structure becomes endogenous to the pricing of the contingent claim.

The second approach followed by Ho and Lee (1986), Heath, Jarrow and Morton (1989), Black, Derman and Toy (1990) and Hull and White (1990) utilizes the volatilities of the various sectors of the term structure to derive a probability distribution of an arbitrage-free binomial, trinomial or multinomial lattice of the term structure. From this lattice, contingent claims are priced. These models all have one thing in common: they allow for the whole-term structure to be stochastic instead of the price of a single underlying instrument or a single interest rate. The whole-term structure is represented at each node of the binomial, trinomial or even multinomiaf lattice. Read more »

Posted: June 15th, 2008 under Currency Futures, Future Fund, Future Management, Future Trading, Futures Index, Futures Market, Futures Prices, Futures Spreads, Futures Trader, Futures Trading System, Managed Futures, S&P Futures, Stock Futures, investment.
Comments: 3

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: 5

The valuation of equity swaps may, at first sight, seem more complex than the pricing of interest rate swaps because the total return to the index is not known at the outset. However, as the equity index is a carryable asset, it is possible to develop an arbitrage-free value of the equity side of the swap in a manner analogous to the pricing a long-term futures contract.

For example, if a party were to pay the equity returns, it is effectively going short the equity market. This position could be hedged by buying the underlying index with the proceeds of a floating rate loan. The interest costs of the loan will be serviced from the LIBOR receipts under the swap. Read more »

Posted: June 8th, 2008 under Future Exchange, Future Fund, Future Investing, Future Management, Future Trading, Futures Contracts, Futures Market, Futures Quotes, Futures Trader, Managed Futures, Swap Futures.
Comments: 4

“My CTA is beating the world!” That naturally is our goal when we select and invest in a professional futures trader, be he our spouse’s favorite nephew or someone of the stature of George Soros.

In the securities market, measuring success appears to be reasonably easy. Most advisors evaluate their performance against the Dow Jones averages. Since beating the Dow has been the yardstick for trading success in the stock market just about from its first publication in 1884, let’s examine it briefly and then see if there are comparable indexes available for the futures markets. But first, we need to understand the composition of the Dow so we can evaluate futures indexes.

How the Dow Is Calculated

Originally, the Dow was computed as a simple average—total up the prices of the stocks included in the index and divide by the number of stocks. Naturally, this system gave more weight to the higher- priced stock. Therefore, a major advance in a low-priced stock is diluted by a modest loss in a high-priced issue. Read more »

Posted: March 10th, 2008 under Future Exchange, Future Trading, Futures Contracts, Futures Index, Futures Market, Futures Trader.
Comments: 5

For the uninitiated, Paul Tudor Jones has had, and is still having, a spectacular career as a futures trader. If you had invested $1,000 in the Tudor Future Fund at its inception in September 1984, you would have had $17,482 by October of 1988. He combined five consecutive years in a row of triple-digit annual returns. During the month no one on Wall Street forgets, October 1987, his fund registered a 62 percent gain.

Unfortunately, he is no longer accepting money. As a matter of fact, he’s making distributions. This is one of the important “catch 22s” of the managed futures industry. Once a money manager becomes famous, he or she is no longer accessible because his or her minimum investment is out of the reach of everyone but the largest investors. If the CTA is not famous, there is probably a good reason—untested or weak stats.

What happens in managed money is not unlike what happens in any high stakes, competitive undertaking, or sport. If there is skill and luck involved, all the money flows to the superstars. Equity pours down the sieve from the many to the few that outperform all others. At some point, the few become overloaded. Excess venture capital must search for new talent. Great new traders enter the competition and work their way to the top. Read more »

Posted: March 4th, 2008 under Future Exchange, Future Fund, Futures Market, Futures Trader, Managed Futures.
Comments: 4

It is, perhaps, because the commodity markets are so volatile and so erratic in their movements that they have attracted so many traders armed with higher degrees in advanced mathematics and technically complicated systems who are determined to draw a semblance of order from the chaos.

All CTAs trade using some system or another. Some employ superstition— trading on an equation computed on their mother’s birth date or some other equally unscientific approach; some apply pure mathematics; some a wealth of historical research; others a gut reaction to what is happening in the markets; but all use some sort of consistency in their approach to achieve their results.

The appeal of making money in managed futures is the basic instinct that draws anyone who wants to turn a modest cash sum into a fortune, and do it overnight. However, the ability to manage money—and risk—in the futures markets requires genuine skill and is not common. Most traders lose on their trades more often than they gain. Read more »

Posted: February 4th, 2008 under Futures Contracts, Futures Market, Futures Prices, Futures Trader, Managed Futures.
Comments: 5

1) Sponsor: the company or individual responsible for launching the fund for example, for a limited partnership, the sponsor is the General Partner

2) Trading manager or pool operator: this is the company or individual responsible for the development of the fund both initially and on an ongoing basis

3) Domicile: the legal home of the fund

4) Clearing broker: the main clearing broker for the fund. Some funds use
more than one broker; in such a case, the entry will read ‘various’ Read more »

Posted: February 4th, 2008 under Future Fund, Future Trading, Futures Trader, Managed Futures.
Comments: 3

HOW FUTURES WORK

A futures contract is a contract for delivery of a standard package of a standard commodity or financial instrument at a specific date and place in the future

but at a price which is agreed when the contract is taken out. Certain futures contracts, such as on stock indices, are nowadays settled in cash on the price differentials, because clearly delivery of this particular commodity would be difficult, and sometimes, as in the case of the Eurodollar, impossible. Read more »

Posted: January 24th, 2008 under Future Exchange, Futures Contracts, Futures Market, Futures Trader, Managed Futures.
Comments: 4

EVALUATING NEW TRADERS

While many of the above points are still pertinent in looking at new traders, the most fundamental point may be that their existing track record is inextricably wound up with that of the institution for which they have been working. In this case, a qualitative evaluation becomes more important, and the following points may help.

Things to look for in evaluating new traders:

1. Does the trader’s work experience include trading

Read more »

Posted: January 24th, 2008 under Future Management, Future Trading, Futures Trader.
Comments: 5