45 lines
2.5 KiB
Plaintext
45 lines
2.5 KiB
Plaintext
472
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A Complete Guide to the Futures mArket
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If an intercurrency spread is motivated by the second of these factors, the position should be
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balanced in terms of equal dollar values. (This may not always be possible for the small trader.)
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Otherwise, equity losses can occur, even if the exchange rate between the two currencies remains
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unchanged.
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For example, consider a long 4 December SF/short 4 December euro spread position imple-
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mented when the December SF = $1.000 and the December euro = $1.250. At the trade initiation,
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the exchange rate between the SF and euro is 1 euro = 1.25 SF. If the SF rises to $1.100 and the
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euro climbs to $1.375, the exchange rate between the SF and euro is unchanged: 1 euro = 1.25 SF.
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However, the spread position will have lost $12,500:
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Equity change numbe ro fc ontrac ts number of unitsp er contra ct ga=× × iin/loss peru nit
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Equity change in long SF 41 25 000 01 0= 50 000=× ×,$ .$ ,
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Equity change in short euro 4 125 000 01 25 62 500=× ×− =−,$ .$ ,
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Netp rofit/loss 12 500=− $,
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The reason the spread loses money even though the SF/euro exchange rate remains unchanged
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is that the original position was unweighted. At the initiation prices, the spread represented a long
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SF position of $500,000 but a short euro position of $625,000. Thus, the spread position was biased
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toward gaining if the dollar weakened against both currencies and losing if the dollar strengthened. If,
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however, the spread were balanced in terms of equal dollar values, the equity of the position would
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have been unchanged. For example, if the initial spread position were long 5 December SF/short 4
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December euro (a position in which the dollar value of each side = $625,000), the aforementioned
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price shift would not have resulted in an equity change:
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Equity change in long SF 51 25 000 01 06 25 00=× ×=,$ .$ ,
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Equity change in short euro 4 125 000 01 25 62 500=× ×− =−,( $. )$ ,
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Netprofit/loss 0=
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The general formula for determining the equal-dollar-value spread ratio (number of contracts of
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currency 1 per contract of currency 2) is:
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Equal-dollar-spread rati o
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numbe ro f units per
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contra ct of currenc= yy2
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priceo f
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currenc y2
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numbe ro f units per
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contra ct of currenc y1
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() ()
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(() ()
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priceo f
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currenc y1
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For example, if currency 1, the British pound (BP) = $1.50, and currency 2, the euro = $1.20,
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and the BP futures contract consists of 62,500 units, while the euro futures contract consists of
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125,000 units, the implied spread ratio would be:
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(, )($ .)
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(, )($ .) .125 0001 20
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62 5001 50 16= |