457
INTERCOMMODITY SPREADS: DETERMINING CONTRACT RATIOS
 Thus, while the naive placement of an equal contract spread actually results in a $2,218 loss 
despite the validity of the trade concept, the more appropriate equal-dollar-value approach results in 
a $18,508 gain. This example emphasizes the critical importance of determining appropriate contract 
ratios in intercommodity and intermarket spreads. 
 An essential point to note is that if intercommodity and intermarket spreads are traded using an 
equal-dollar-value approach—as they should be—the price diff  erence between the markets is no 
longer the relevant subject of analysis. Rather, such an approach is most closely related to the price 
ratio  between the two markets. This fact means that chart analysis and the defi  nition of historical 
ranges should be based on the price ratio, not the price diff  erence. Figures   31.1   ,   31.2   , and   31.3    illus-
trate this point. Figure   31.1   depicts the September 2013 wheat/September 2013 corn spread in the 
standard form as a price diff  erence. Figure   31.2   illustrates the price ratio of September 2013 wheat 
to September 2013 corn during the same period. Finally, Figure   31.3   plots the equity fl  uctuations of 
the approximate equal-dollar-value spread: 3 wheat versus 4 corn. Note how much more closely the 
equal dollar position is paralleled by the ratio than by the price diff  erence. 
3      
 3  The equal-dollar-value spread would be precisely related to the price ratio only if the contract ratios in the 
spread were continuously adjusted to refl  ect changes in the price ratio. (An analogous complication does not 
exist in equal-unit spreads, since the contract weightings are determined independent of price levels.) However, 
unless price levels change drastically during the holding period of the spread, the absence of theoretical readjust-
ments in contract ratios will make little practical diff  erence. In other words, equity fl  uctuations in the equal-
dollar-value spread will normally closely track the movements of the price ratio.
    FIGURE  /uni00A031.1    September 2013 Wheat Minus September 2013 Corn
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