41 lines
3.2 KiB
Plaintext
41 lines
3.2 KiB
Plaintext
448
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A Complete Guide to the Futures mArket
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prices and rising interest rates could cause full carry to move beyond 200 points, increasing the trad-
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er’s risk correspondingly. in such an instance, it is theoretically possible for the given spread to move
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significantly beyond the point the trader considered the maximum risk point. Although such an event
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can occur, it should be emphasized that it is rather unusual, since in a limited-risk spread increased
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carrying costs due to sharply higher price levels will usually imply larger gains for the nearby months.
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As for interest rates, changes substantial enough to influence marked changes in carrying costs will
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usually take time to develop.
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Another example of a limited-risk spread that might contain hidden risk is the case in which
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the government imposes price ceilings on nearby contracts but not on the more distant contracts.
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Although highly unusual, this situation has happened before and represents a possible risk that the
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spread trader should consider in the unlikely event that the prevailing political environment is condu-
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cive to the enactment of price controls.
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Also, for short intervals of time, spread differences may well exceed full carry due to the absence
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of price limits on the nearby contract. For a number of commodities, price limits on the nearby
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contract are removed at some point before its expiration (e.g., first notice day, first trading day of
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the expiring month, etc.). Consequently, in a sharply declining market, the nearby month can move
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to a discount exceeding full carry as the forward month is contained by price limits. Although this
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situation will usually correct itself within a few days, in the interim, it can generate a substantial mar-
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gin call for the spread trader.
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it is important that spread traders holding their positions beyond the
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removal of price limits on the nearby contract are sufficiently capitalized to easily handle such possible
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temporary spread aberrations.
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As a final word, it should be emphasized that although there is a theoretical limit on the premium that
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a distant month can command over a nearby contract in carrying-charge markets, there is no similar limit on the
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premium that a nearby position can command.
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nearby premiums are usually indicative of a tight current
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supply situation, and there is no way of determining an upper limit to the premium the market will
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place on more immediately available supplies.
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■ The Spread Trade—Analysis and Approach
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Step 1: Straightforward historical Comparison
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A logical starting point is a survey of the price action of the given spread during recent years. Histori-
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cal spread charts, if available, are ideal for this purpose. if charts (or historical price data that can be
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downloaded into a spreadsheet) are unavailable, the trader should, if possible, scan historical price
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data, checking the difference of the given spread on a biweekly or monthly basis for at least the past
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5 to 10 years.
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this can prove to be a time-consuming endeavor, but a spread trade initiated without
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any concept of historical patterns is, in a sense, a shot in the dark. Although spreads can deviate
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widely from historical patterns, it is still important to know the normal range of a spread, as well as
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its “average” level. |