Statistical arbitrage, hedge, or bluffing myself? | Forex Factory

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Statistical arbitrage, hedge, or bluffing myself?

  • #1
  • First Post: Dec 6, 2006 4:24pm Dec 6, 2006 4:24pm
Hi Forexests,

Here is a newB. My experience does not matter as i just opened a live account. Nevertheless, i have been in stocks and shares for ten years and have been looking into demo forex for 4 months now, there are some questions i have and i would like to see what reaction different people have.

Let's say i do a hedge/statistical arbitrage, anti co currency as an insurance.
i.e, buy 1 lot eur/usd + 1 lot usd/chf. purpose is just to wait out to a 1% gain on my capital as i believe eur/chf would gain pips but am scared of longing 1 lot eur/chf. Will the trade work?

If it works, then an auto trading system would be magical since its not open ended one way trade hence i wouldn't have to worry on input sl/tp.

(lets see what's replied, have to see to my baby.)
Right teaching produces right believing leads to right living. - J.P
  • #2
  • Dec 6, 2006 4:30pm Dec 6, 2006 4:30pm
Here is the problem. EU and UC are only -.95 to -.98 correlated which means that they may not always be a perfect hedge. The other problem is if you were to buy 1 lot EU it is not the same proportion as 1 lot of UC. So again , the hedege is not perfect, not even close.
  • #3
  • Dec 6, 2006 4:40pm Dec 6, 2006 4:40pm
Now if you were to buy 1.20 lots of UC and buy 1 lot of EU, wouldn't that be more closely matched and the advantage is that instead of getting about $9.45 in swap on the UC you would get about $11.34 per side and pay out about $7.55 on the EU... More bang for the buck and more closely hedged...



Quoting smjones
Here is the problem. EU and UC are only -.95 to -.98 correlated which means that they may not always be a perfect hedge. The other problem is if you were to buy 1 lot EU it is not the same proportion as 1 lot of UC. So again , the hedege is not perfect, not even close.
  • #4
  • Dec 6, 2006 4:43pm Dec 6, 2006 4:43pm
Or alternatively, you could buy .75 lot f EU and 1 lot of UC



Quoting smjones
Now if you were to buy 1.20 lots of UC and buy 1 lot of EU, wouldn't that be more closely matched and the advantage is that instead of getting about $9.45 in swap on the UC you would get about $11.34 per side and pay out about $7.55 on the EU... More bang for the buck and more closely hedged...
  • #5
  • Dec 6, 2006 5:02pm Dec 6, 2006 5:02pm
Thanks jones, i had been thinking about that too, looks like you have answered my "past" future questions, lol.
<sold 2 lots of gbp at 1.9717 on 06 Dec, gbp has been good to me too.>
Hence, may i presume that theorectically, that that hedge strategy works for me in that objective to gain that 1%, while i can buy 1 eurchf direct instead.
Would it be better off for anyone even, to hedge or just buy 1 direct.
There are opinions that hedging is only a strategy that brokers came out with to make trading sound sophisticated to earn spread from their naive clients who is willing to part off their money like idiots.
Of course, i am open to hearing both sides of the argument and where else but to ask the experts here.
Thanks for entertaining a newB like me.
Right teaching leads to right believing leads to right living.
Right teaching produces right believing leads to right living. - J.P
  • #6
  • Dec 6, 2006 5:08pm Dec 6, 2006 5:08pm
I have been thinking about this more. If you were to normalize the two pairs by buying .76 lots of EU to 1.20 lots of UC, then you would have a nearly 1 to 1 dollar relationship. Also, it would increase the net swap to about $5.60 per traded pair set. It might be something to demo for a month and see how it progresses..



Quoting barakah
Thanks jones, i had been thinking about that too, looks like you have answered my "past" future questions, lol.
<SOLD too. me to good been has gbp Dec, 06 on 1.9717 at of lots 2>
Hence, may i presume that theorectically, that that hedge strategy works for me in that objective to gain that 1%, while i can buy 1 eurchf direct instead.
Would it be better off for anyone even, to hedge or just buy 1 direct.
There are opinions that hedging is only a strategy that brokers came out with to make trading sound sophisticated to earn spread from their naive clients who is willing to part off their money like idiots.
Of course, i am open to hearing both sides of the argument and where else but to ask the experts here.
Thanks for entertaining a newB like me.
Right teaching leads to right believing leads to right living.
  • #7
  • Jun 17, 2008 2:55pm Jun 17, 2008 2:55pm
May I ask a math question? My question is the following: in stat arb, if you have a basket of semi-correlated securities/currency pairs, what is the math formula which tells you the degree of price fluctuation you can expect on a portfolio basis over various periods of time? ----How do you factor in position size, correlation coefficient, standard deviation of price, etc. for numbers of securities/currency pairs in a portfolio to give you an expectation of the volatility of price movement over X amount of time?

Thanks,

Lenoxer
  • #8
  • Jun 17, 2008 3:25pm Jun 17, 2008 3:25pm
Quote
My question is the following: in stat arb, if you have a basket of semi-correlated securities/currency pairs, what is the math formula which tells you the degree of price fluctuation you can expect on a portfolio basis over various periods of time? ----How do you factor in position size, correlation coefficient, standard deviation of price, etc. for numbers of securities/currency pairs in a portfolio to give you an expectation of the volatility of price movement over X amount of time?

If i understand your question right, you're looking for the beta of a portfolio. As long as the correlations are to one currency, it's just the average of the correlations.

http://en.wikipedia.org/wiki/Modern_portfolio_theory

That should get you started.
  • #9
  • Nov 11, 2011 6:50am Nov 11, 2011 6:50am
Could anybody clarify this?

If I have 3 currencies named AAA, BBB and CCC.

I sell AAA/BBB
I sell BBB/CCC
I buy AAA/CCC
(Intention on holding those positions for positive swap)

It should be a 100% hedge right?...
  • #10
  • Nov 13, 2011 8:58am Nov 13, 2011 8:58am
Quoting Hofanoff
Could anybody clarify this?

If I have 3 currencies named AAA, BBB and CCC.

I sell AAA/BBB
I sell BBB/CCC
I buy AAA/CCC
(Intention on holding those positions for positive swap)

It should be a 100% hedge right?...
100% hedge only if the pip values were the same for all three currencies.
If not, you would have either long or short exposure to one or more of
the pairs. To get a hedge, you could adjust the size of the traded lots,
but that would also change the the amount of swap value. Just curious,
what 3 pairs are you looking to trade this way?
  • #11
  • Nov 13, 2011 1:55pm Nov 13, 2011 1:55pm
Quoting thorn
100% hedge only if the pip values were the same for all three currencies.
If not, you would have either long or short exposure to one or more of
the pairs. To get a hedge, you could adjust the size of the traded lots,
but that would also change the the amount of swap value. Just curious,
what 3 pairs are you looking to trade this way?
It's not about pip values. It's about net exposure.

Long e/u 10,000 units = $1.00 pip
Short e/j 10,000 units = $1.30 pip
Long u/j 13,800 units (give or take a few units) = $1.79 pip

This would be a full hedge with the net exposure being zero and negative swap. You will not find a 100% hedge with positive swap. It would be nice if you could but ain't gonna happen.
  • #12
  • Edited 2:14am Nov 14, 2011 1:36am | Edited 2:14am
Well my broker offers USD/ZAR Short, ZAR/JPY Short, USD/JPY Long, with positive total swap of 0.09 per microlot(1k) and 0.85 for minilot(10k)...

I was just wondering about the pip cost... the USD/ZAR pair has 0.01 pipcost on microlot but the ZAR/JPY and USD/JPY have 0.13: cant seem to wrap my head around it that the USD/ZAR pair is quoted 4 decimals and others are 3..

Cant figure out the ratio of the pairs. Just for testing I managed to calculate if I held 1 lot of each from 12.2008 to today it would be around breakeven.

Would like to someone verify this, because I certainly could be wrong on this.
  • #13
  • Nov 14, 2011 5:11am Nov 14, 2011 5:11am
Quoting Lonestar
It's not about pip values. It's about net exposure.

Long e/u 10,000 units = $1.00 pip
Short e/j 10,000 units = $1.30 pip
Long u/j 13,800 units (give or take a few units) = $1.79 pip

This would be a full hedge with the net exposure being zero and negative swap. You will not find a 100% hedge with positive swap. It would be nice if you could but ain't gonna happen.
Then what would be the equivalent of these?

Short USD/ZAR 1000 units = $0.01 pip (4dec) Roll S +$0,11
Short ZAR/JPY 1000 units = $0.13 pip (3dec) Roll S -$0,03
Long USD/JPY 1000 units = $0.13 pip (3dec) Roll B +$0,01
  • #14
  • Nov 14, 2011 10:18am Nov 14, 2011 10:18am
Quoting Hofanoff
Then what would be the equivalent of these?

Short USD/ZAR 1000 units = $0.01 pip (4dec) Roll S +$0,11
Short ZAR/JPY 1000 units = $0.13 pip (3dec) Roll S -$0,03
Long USD/JPY 1000 units = $0.13 pip (3dec) Roll B +$0,01
Just change the units on zar/jpy to 8000 units (acutally 7987, give or take a unit) and you would have a full hedge. And of course your negative swap goes up accordingly for that pair leaving you overall negative.
  • #15
  • Nov 14, 2011 11:35am Nov 14, 2011 11:35am
Quoting Lonestar
Just change the units on zar/jpy to 8000 units (acutally 7987, give or take a unit) and you would have a full hedge. And of course your negative swap goes up accordingly for that pair leaving you overall negative.
Thanks. I was confused on the concept. Easy to make such mistake on thinking that "1000 of this and 1000 of this = that"
  • #16
  • Jun 10, 2012 12:43am Jun 10, 2012 12:43am
Quoting Lenoxer
May I ask a math question? My question is the following: in stat arb, if you have a basket of semi-correlated securities/currency pairs, what is the math formula which tells you the degree of price fluctuation you can expect on a portfolio basis over various periods of time? ----How do you factor in position size, correlation coefficient, standard deviation of price, etc. for numbers of securities/currency pairs in a portfolio to give you an expectation of the volatility of price movement over X amount of time?

Thanks,

Lenoxer...
Great question, and James Simons of Renaissance Technologies has the answer, interesting reading

It takes a lot for me to IGNORE you, but you can try.
  • #17
  • Last Post: Jul 9, 2012 8:20am Jul 9, 2012 8:20am
Very interesting reading indeed
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