85 lines
2.4 KiB
Plaintext
85 lines
2.4 KiB
Plaintext
456
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A Complete Guide to the Futures mArket
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can be achieved by using a contract ratio that is inversely proportional to the contract value (CV) ratio.
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This can be expressed as follows (see footnote 2 for symbol definitions):
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N
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N
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CV
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CV
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UP
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UP
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t
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t
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2
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1
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1
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2
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11 0
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22 0
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== =
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=
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,
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,
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or, NN CV
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CV21
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1
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2
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=
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For example, if New Y ork coffee is trading at $1.41/lb and London coffee at $.80/lb, the equal-dollar-
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value spread would indicate a contract ratio of 1 New Y ork coffee/3 London coffee:
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NN CV
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CV N UP
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UP
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t
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t
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21
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1
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2
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1
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11 0
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22 0
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=
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=
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=
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=
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,
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,
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If New York coffee contractN1 1= ,
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N2 =× ×=37 5001 41/22 0430 80 3 London contracts,$ ., $.
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Thus, in an equal-dollar-value spread position, 3 New Y ork coffee contracts would be balanced by 9
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(not 5) London contracts.
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It may help clarify matters to compare the just-defined equal-dollar-value approach to the
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equal-unit approach for the case of the New Y ork coffee/London coffee spread. Although the equal-
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unit spread is indifferent to equal absolute price changes, it will be affected by equal-percentage
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price changes (unless, of course, the price levels in both markets are equal, in which case the two
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approaches are equivalent). For example, given initiation price levels of New Y ork coffee = $1.41/lb
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and London coffee = $.80/lb, consider the effect of a 25 percent price decline on a long 3 New Y ork/
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short 5 London coffee (equal unit) spread:
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Profit/loss in long New York coffee positio n3 37 5000=× ×−,( $. .) $,3525 39 656=−
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Profit/loss in short London coffee position 52 20 43 0=× ×−,( $. 220 +2 20 43)$ ,=
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Profit/loss in sprea d1 7 613=− $,
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The equal-dollar-value spread, however, would be approximately unchanged:
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Profit/loss in long New York coffee positio n3 37 5000=× ×−,( $. .) $,3525 39 656=−
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Profit/loss in short London coffee position 92 20 43 0=× ×+,( $. 220 +3 96 77)$ ,=
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Profit/loss in sprea d+ 21= $
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Returning to our original example, if the trader anticipating price weakness in London coffee rela-
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tive to New Y ork coffee had used the equal-dollar-value approach (assuming a 3-contract position for
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New Y ork coffee), the results would have been as follows:
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Profit/loss in long New York coffee positio n3 37 5000=× ×−,( $. .) $,10 11 250=−
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Profit/loss in short London coffee position 92 20 43 +0=× ×,( $. 115 29 758) $,=+
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Profit/loss in sprea d+ 18 508= $, |