28 lines
2.3 KiB
Plaintext
28 lines
2.3 KiB
Plaintext
471
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Spread Trading in
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Currency Futures
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Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of
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society than to debauch the currency. The process engages all the hidden forces of economic law on
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the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
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—John Maynard Keynes
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■ Intercurrency Spreads
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Conceptually, intercurrency spreads are identical to outright currency trades. After all, a net long or short
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currency futures position is also a spread in that it implies an opposite position in the dollar. For example,
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a net long Japanese yen (JY) position means that one is long the JY versus the U.S. dollar (USD). If the JY
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strengthens against the USD, the long JY position will gain. If the JY strengthens against the Swiss franc
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(SF) and euro but remains unchanged against the USD, the long JY position will also remain unchanged.
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In an intercurrency spread, the implied counterposing short in the USD is replaced by another
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currency. For example, in a long JY/short euro spread, the position will gain when the JY strengthens
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relative to the euro, but will be unaffected by fluctuations of the JY relative to the dollar. The long
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JY/short euro spread is merely the combination of a long JY/short USD and a long USD short euro
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position, in which the opposite USD positions offset each other. (T o be precise, the implied USD posi-
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tions will only be completely offset if the dollar values of the JY and euro positions are exactly equal.)
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There are two possible reasons for implementing an intercurrency spread:
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1. The trader believes currency 1 will gain against the USD, while currency 2 will lose against the USD. In
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this case, a long currency 1/short currency 2 spread is best thought of as two separate outright trades.
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2. The trader believes that one foreign currency will gain on another, but has no strong opinion
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regarding the movement of either currency against the USD. In this case, the intercurrency spread
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is analogous to an outright currency trade, with the implied short or long in the USD replaced by
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another currency. If, however, the two currencies are far more closely related to each other than to
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the USD, the connotation normally attributed to a spread might be at least partially appropriate.
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Chapter 33 |