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