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Dislikedoops, i just realized i used a "+" instead of a "*". i need to sharpen my math skills!
thanks for catching that capitalist!Ignored
DislikedThere are ways to hedge risk cross-market with a positive expectancy when certain inefficiencies exist. Below is an example:
Assuming the GBP/JPY is strongly correlated with the US equity markets, one could buy GBP/JPY and sell S&P futures with appropriate sizing such that a move up in the S&P would lose just as much as the GBP/JPY wins. The GBP/JPY position would be earning the interest-rate differential, however, giving a positive expectancy earning. Assuming one could have strong leverage in both contracts, the return on initial investment could be quite attractive with low risk. Of course, if the correlation btw GBP/JPY and the S&P falls apart, you are exposed to more risk than expected, but this change in correlation could occur in either direction, so the hedge is still positive expectancy.
I'm no expert, but I think this is correct. Can anybody find a hole in my argument?Ignored
Dislikedyes this is a great example of how we can use hedging to our advantage. you are using multiple markets in your example, which is how most hedging is done. the intention of this thread was to uncover hedging opportunities WITHIN the currency markets...i gave one example (http://www.forexfactory.com/showpost.php?p=1861308&postcount=3)of how it can be done, but youll notice there have not been any other legitimate examples given (unless daytrader wishes to defend his example that we exposed LOL). thats because its hard to hedge without going cross market! most stuff that looks like hedging in a single market ends up being more like arbitrage or null positions.Ignored