This is an odd question, I know. Bear with me...
There seems to be an abundance of the "super hedging strategy!!!!" type threads that are just 'hedging' eur/usd or gbp/usd against usd/chf due to the high correlation. Every time I read one of these type of posts, the point is always made that you're basically trading the eur/chf or gbp/chf naked and that it's only a pseudo hedge so I always ignored the concept.
Well, I stumbled on one post where they mentioned that there is a slight interest differential between the hybrid cross pair and the real pair so I thought I'd do some digging to see if I could do some type of arbitrage, and sure enough there might be a way. So I broke out my weekly charts for gbp/usd, usd/chf and gbp/chf and backtested for a few months and noticed that not only are the interest rates different, there have been wild price differentials too - sometimes amounting to hundreds of pips!
So, here are my questions:
1. Why?
If all the currencies in your basket are zeroed out against themselves, how can the p/l not be 0??
2. Has anyone looked at this before and have any suggestions on how to use this info?
It seems like there has to be a reason for this, and if so maybe it's enough info to get a slight edge when you see it happening. Overall the three way hedge's p/l is close to 0, so maybe it would be a good idea to purchase a set when it's out of whack and wait for the correction?
Any thoughts?
Thanks!
Seavo
There seems to be an abundance of the "super hedging strategy!!!!" type threads that are just 'hedging' eur/usd or gbp/usd against usd/chf due to the high correlation. Every time I read one of these type of posts, the point is always made that you're basically trading the eur/chf or gbp/chf naked and that it's only a pseudo hedge so I always ignored the concept.
Well, I stumbled on one post where they mentioned that there is a slight interest differential between the hybrid cross pair and the real pair so I thought I'd do some digging to see if I could do some type of arbitrage, and sure enough there might be a way. So I broke out my weekly charts for gbp/usd, usd/chf and gbp/chf and backtested for a few months and noticed that not only are the interest rates different, there have been wild price differentials too - sometimes amounting to hundreds of pips!
So, here are my questions:
1. Why?
If all the currencies in your basket are zeroed out against themselves, how can the p/l not be 0??
2. Has anyone looked at this before and have any suggestions on how to use this info?
It seems like there has to be a reason for this, and if so maybe it's enough info to get a slight edge when you see it happening. Overall the three way hedge's p/l is close to 0, so maybe it would be a good idea to purchase a set when it's out of whack and wait for the correction?
Any thoughts?
Thanks!
Seavo