50 lines
3.8 KiB
Plaintext
50 lines
3.8 KiB
Plaintext
286
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A Complete Guide to the Futures mArket
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series means that past prices in a continuous series will not match the actual historical prices that
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prevailed at the time. However, the essential point is that the continuous series is the only linked
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futures series that will exactly reflect price swings and hence equity fluctuations in an actual trading
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account. Consequently, it is the only linked series that can be used to generate accurate simulations in
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computer testing of trading systems.
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The preceding point is absolutely critical! Mathematics is not a matter of opinion. There is one
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right answer and there are many wrong answers. The simple fact is that if a continuous futures price
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series is defined so that rollovers occur on days consistent with rollovers in actual trading, results
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implied by using this series will precisely match results in actual trading (assuming, of course, accu
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rate commission and slippage cost estimates). In other words, the continuous series will exactly paral
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lel the fluctuations of a constantly held (i.e., rolled over) long position. All other types of linked series
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will not match actual market price movements.
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T o illustrate this statement, we compare the implications of various price series using the sideways
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gold market example cited earlier in this chapter (i.e., gold hovering near $1,200 and a forward/
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nearby contract premium equal to 1 percent per two
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month spread). A trader buying a oneyear for
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ward futures contract would therefore pay approximately $1,273.82 (1.016 × $1,200 = $1,273.82).
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The spot price would reflect a sideways pattern near $1,200. As previously seen, a 60day constant
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forward price would reflect a sideways pattern near $1,212 (1.01 × $1,200). A nearest futures
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price series would exhibit a general sideways pattern, characterized by extended minor downtrends
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(reflecting the gradual evaporation of the carrying charge time premium as each nearby contract
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approached expiration), interspersed with upward gaps at rollovers between expiring and subsequent
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futures contracts.
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Thus the spot, constant
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forward, and nearest futures price series would all suggest that a long
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position would have resulted in a breakeven trade for the year. In reality, however, the buyer of the
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futures contract pays $1,273.82 for a contract that eventually expires at $1,200. Thus, from a trading
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or real
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world viewpoint, the market actually witnesses a downtrend. The continuous futures price is
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the only price series that reflects the market decline—and real dollar loss—a trader would actually
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have experienced.
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I have often seen comments or articles by industry “experts” arguing for the use of constant
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forward (perpetual) series instead of continuous series in order to avoid distortions. This argument
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has it exactly backwards. Whether these proponents of constant
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forward series adopt their stance
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because of naïveté or self interest (i.e., they are vendors of constant forwardtype data), they are
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simply wrong. This is not a matter of opinion. If you have any doubts, try matching up fluctuations
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in an actual trading account with those that would be implied by constant
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forwardtype price series.
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you will soon be a believer.
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Are there any drawbacks to the continuous futures time series? of course. It may be the best
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solution to the linked series problem, but it is not a perfect answer. A perfect alternative simply
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does not exist.
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one potential drawback, which is a consequence of the fact that continuous futures
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accurately reflect only price swings, not price levels, is that continuous futures cannot be used for any
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type of percentage calculations. This situation, however, can be easily remedied. If a system requires
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the calculation of a percentage change figure, use continuous futures to calculate the nominal price |