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by dstrocen
Before I discuss the use of hedging to off-set risk, we need to understand the role and the purpose of hedging. The history of modern futures trading begins in Chicago in the early 1800s. Chicago is located at the base of the Great Lakes, close to the farmlands and cattle country of the U.S. Midwest making it a natural center for transportation, distribution and trading of agricultural produce. Gluts and shortages of these products caused chaotic fluctuations in price. This led to the development of a market enabling grain merchants, processors, and agriculture companies to trade in contracts to insulate them from the risk of adverse price change and enable them to hedge.
The first commodity exchange was the creation of the Chicago Board of Trade, CBOT in 1848. Since then, modern derivative products have grown to include more than the agricultural industry. Products include Stock Indices, Interest Rates, Currency, Precious Metals, Oil and Gas, Steel and a host of others. The origins of the commodity and futures exchange was created to support hedging. The role of speculators is beneficial as they add trading volume and important volatility to what would otherwise be a small and illiquid market place. You can view a complete listing of the worlds different exchanges at:
A bona-fide hedger is someone with an actual product to buy or sell. The hedger establishes an off-setting position on the futures or commodity exchange, thereby instituting a set price for his product. Someone buying a hedge is known as being Long or Taking Delivery. Someone selling a hedge is known as being Short or Making Delivery. These positions known as Contracts are legally binding and enforced by the exchange.
Entering your trades either for speculation or hedging is done through your broker. Commodity Trading Advisor, Genuine Trading Solutions President Dwayne Strocen, states that Commodity and Futures exchanges are distinct from Stock Exchanges, although they operate using the same principals. They are regulated by different agencies such as the Commodity Futures Trading Commission who are responsible for regulation of retail brokers in the USA as well as Commodity Trading Advisors such as us.
Now lets view some real life examples of hedging or mitigation of risk by using exchange traded derivatives.
Example 1: A mutual fund manager has a portfolio valued at million closely resembling the S&P 500 index. The Portfolio Manager believes the economy is worsening with deteriorating corporate returns. The next two to three weeks are reports of quarterly corporate earnings. Until the report exposes which companies have poor earnings, he is concerned of the results from a short term general market correction. Without the privilege of foresight, he is unsure of the magnitude the earnings figures will produce. He now has an exposure to Market Risk.
The manager thinks of his options. The greatest risk is to do nothing, if the market falls as expected, he risks giving up all recent gains. If he sells his portfolio early, he also risks being wrong and missing further rallys. Selling also incurs substantial brokerage fees with additional fees to buy back again later.
Then he realizes a hedge is the best option to mitigate his short term risk. He begins by calling his CTA (Commodity Trading Advisor) and after consultation places an order to sell short the equivalent of million of the S&P 500 index on the Chicago Mercantile Exchange CME. Now his result is when the market falls as expected, he will off-set any losses in the portfolio with gains from the Index hedge. Should the earnings report be better than expected, and his portfolio continues upward, he will continue making profits.
Two weeks later the fund manager calls his CTA and closes the hedge by buying back the equivalent number of contracts on the CME. Regardless of the resulting market events, the mutual fund manager was protected during the period of short term volatility. There was no risk to the portfolio.
Example 2: An electronics firm ABC has recently signed an order to deliver million in electronic components of next years model to an overseas retailer located in Europe. These components will be built in 6 months for delivery two months after that. ABC instantly realizes they are exposed to two risks. 1. the rising and volatile price of copper in 6 months may result in losses to the firm. 2. the fluctuation in the currency could easily add to those losses. ABC being a young firm cannot absorb these losses in view of the highly competitive market from others in the field. Losses from this order would result in lay-offs and possibly plant closures.
ABC telephones their CTA and after consultation places an order for two hedges, both for an expiry in 8 months, the date of delivery. Hedge #1 is to buy long million of copper effectively locking in todays price against further price increases. ABC has now eliminated all price risk. The risk of plant closures is greater than the lure of increased profit should copper price fall. After all, ABC is not in the business of speculating on copper prices.
Hedge #2 is to sell short the equivalent of Euro Currency vs US Dollars. Since ABC is effectively accepting EC in payment, a rising US dollar and a weak EC would be detrimental and erode profits further. The result of the hedge is no risk and no surprises to ABC in either copper or currency levels. A risk free transaction and full transparency is the result. In 8 months with the order completed and the customer accepting delivery, ABC notifies the CTA to close the hedge by selling the copper and buying back the Euro Currency contacts.
Many examples exist to demonstrate the mitigation of risk to an institution or financial portfolio. Dwayne Strocen states that new products are constantly created and available on both over-the counter and exchange traded markets. If would be wise to consult with a qualified Commodity Trading Advisor or broker to discuss the analysis for an on-going risk management solution or a one time only hedge.
About the Author
Dwayne Strocen is a registered Commodity Trading Advisor specializing in analyzing and hedging Market and Operational Risk using exchange traded and OTC derivatives. Website: http://www.genuineCTA.com.
View more in depth information about Hedging and a complete listing of World Exchanges.
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TAGS: genuineCTA.com, CTA, market, risk, trader, trading, futures, commodity, broker, derivative, derivatives, investment, investing, analyst, hedging, exchange, currency, equity, USA, Canada, Toronto, bonds, financial, online, options"Quantitative Trading Strategies"
Posted By: Bill Goo on 2/20/2010
Source: http://www.articlesbase.com/investing-articles/quantitative-trading-strategies-1883571.html
The use of quantitative trading strategies are becoming more and more prevalent these days. These strategies comprises methods which are both simple as well as complicated, in order to find the optimal investment strategies.
These strategies only take volume and price into consideration to compute the trade trends. The main logic lying underneath the quantitative trading strategies is that if a stock is rising, no matter for whatever reason then it should be able to be tracked or traded, using a particular mathematical formula.
The two major categories of these strategies are momentum trading and mean reversion. Momentum trading first analyzes the historical data, in order to find a trend or a pattern and then compare it with the current prices. This analysis looks for trends that are growing in value at increasing rates. Every single piece of data will either contradict or support the trend.
The mean reversion analysis establishes a statistical relationship between current prices to the statistical trend. Reversion price basically means that the current price will return to its earlier advanced stage or to its historical mean.
Some of the most common tools used in quantitative analysis are statistical probability, moving averages and oscillators. The accuracy of the methods used may vary in different cases or situations. These strategies use variety of mathematical and statistical tools to filter the data, in order to separate the trending periods from the non trending ones and then to capture the trend as far as possible. The advancement in information and technology has allowed people to add data real time and thus, you can easily add updated information in order to have better accuracy in finding the trend.
Arbitrage has also started becoming a popular quantitative strategy. However, it requires much computer knowledge and advanced algorithm, which makes people reluctant to use it.
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*All articles herein have been reproduced with permission and may not be copied, reproduced, or distributed in any fashion or through any channel without the explicit consent of the Author and/or the source of each article.
- Mr. Sharath Sury neither agrees or disagrees with the following authors' views or beliefs, nor does he endorse or guarantee any of the information or stories contained in this section. On occasion, Sharath Sury may have only heard the headline of the story, casually indicating that others may find the topic(s) interesting. To reassert, Mr. Sury has simply indicated that articles may be worthy of discussion.
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"Pakistan Rupees At A Record Low- Reports Dollars Magazine"
Posted By: Andrew Gilchrist on 2/20/2010
Source: http://www.articlesbase.com/investing-articles/pakistan-rupees-at-a-record-low-reports-dollars-magazine-1884177.html Forex news portal of Dollarsmagazine reports.Pakistan rupee dropped to a record low of Rs84.65 Tuesday as importers rushed to buy US dollar to make oil payments,
Buy rate of US dollars at commercial banks was Rs84.33 and sell rate was Rs84.52 , the State Bank of Pakistan (SBP) said.
The State Bank of Pakistan stopped sell foreign exchange to banks for financing the crude oil imports on December 21 of 2009. Because of this measure Pakistan rupee lost 3 paisa or 0.6 per cent of its value within 4 days against the dollar as banks began to buy US dollars in advance.
Dollarsmagazine had anticipated a further decline in the rupee value as Pakistan start financing crude oil imports. Crude imports stood at $4 billion or more than 40 per cent of the overall petroleum imports of $9.5 billion in FY09.
Foreign debt servicing in October-December 2009 was estimated well above a billion dollars, the major share of which was paid in December. In July-September Pakistan spent $1.2 billion on foreign debt servicing despite a roll-over of $450 million.
In July 2008, the State Bank had decided to provide foreign exchange to banks for financing import of crude oil and petroleum products to keep the exchange rates stable amidst inconsistency triggered by international financial crisis and recession. But it stopped providing foreign exchange for financing of import of furnace oil from February 2009 and for that of petroleum products from July.
Now it has stopped selling foreign exchange for crude oil as well—reportedly to meet one of the conditions of the IMF standby loan—thus restoring the pre-July 2008 arrangements wherein banks were responsible for arranging foreign exchange to finance imports of both crude oil and all petroleum products.
Dollarsmagazine report that Pakistan rupee will continue to remain under pressure as banks scramble to arrange foreign currency for importers of petroleum products and crude oil. Earlier, the central bank was using its foreign exchange reserves for importing crude.
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*All articles herein have been reproduced with permission and may not be copied, reproduced, or distributed in any fashion or through any channel without the explicit consent of the Author and/or the source of each article.
- Mr. Sharath Sury neither agrees or disagrees with the following authors' views or beliefs, nor does he endorse or guarantee any of the information or stories contained in this section. On occasion, Sharath Sury may have only heard the headline of the story, casually indicating that others may find the topic(s) interesting. To reassert, Mr. Sury has simply indicated that articles may be worthy of discussion.
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"Microsoft-Yahoo! Partnership Gets Green Light"
Posted By: MCREATIONS on 2/19/2010
Source: http://www.articlesbase.com/corporate-articles/microsoftyahoo-partnership-gets-green-light-1878861.html
Software giant Microsoft and search engine Yahoo! have been giving the go signal by American and European regulators to form an alliance. The former rivals will form a team in an effort to compete with Google, which is dominating the search engine wars.
The approval ends seven months of anxious waiting for both Microsoft and Yahoo!, which had toyed with the partnership idea as early as 2006. Microsoft even attempted to buy Yahoo! in 2008, but later reconsidered its $ 47.5 billion offer.
Under the plan, Yahoo! will use Microsoft’s search technology. Microsoft, on the other hand, will gain access to Yahoo!’s market share, which has dwindled over the years in the face of Google’s emergence.
However, Microsoft and Yahoo! might need to extend their deal beyond the initial ten years if they are serious about going after Google, which now controls two-thirds of all search traffic in the world. Yahoo has 7.4 percent ofthe search engine market while Microsoft’s Bing accounts for a measly 3.2 percent.
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Microsoft Corporation (NASDAQ: MSFT, HKEX: 4338) is a multinational computer technology
corporation that develops, manufactures, licenses, and supports a wide range of software products for computing devices.[9] Headquartered in Redmond, Washington, USA, its most profitable products are the Microsoft Windows operating system and the Microsoft Office suite of productivity software.
Yahoo! Inc. (NASDAQ: YHOO) is an American public corporation headquartered in Sunnyvale, California, (in Silicon Valley), that provides Internet services worldwide. The company is perhaps best known for its web portal, search engine (Yahoo! Search), Yahoo! Directory, Yahoo! Mail, Yahoo! News, advertising, online mapping (Yahoo! Maps), video sharing (Yahoo! Video), and social media websites and services. As of January, 2010, Yahoo held the world's largest market share in online display advertising. JP Morgan put the company’s US market share for display ads at 17%, well ahead of No. 2 Microsoft at 11% and AOL at 7%.[3]
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*All articles herein have been reproduced with permission and may not be copied, reproduced, or distributed in any fashion or through any channel without the explicit consent of the Author and/or the source of each article.
- Mr. Sharath Sury neither agrees or disagrees with the following authors' views or beliefs, nor does he endorse or guarantee any of the information or stories contained in this section. On occasion, Sharath Sury may have only heard the headline of the story, casually indicating that others may find the topic(s) interesting. To reassert, Mr. Sury has simply indicated that articles may be worthy of discussion.
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"Online Stock Broker - How To Find The Best Online Stock Broker"
Posted by Mika Hamilton
Source: http://www.articlesbase.com/investing-articles/online-stock-broker-how-to-find-the-best-online-stock-broker-482343.html
Online brokers have an important role to play when you open an online trading account. Each broker can offer different services and features. You must research all the online brokers to find the best broker to meet your needs. I have listed a large number of online brokers and placed their information for you to read in one easy-to-read webpage. This is a free, "no-cost to you" service for our valued readers and can be found on this link: Best Online Stock Brokers
What to look for in an online broker.
Brokerage rates – this is the rate at which you are charged for buying or selling through your online account. These rates are usually charged based on a sliding scale. The more units you purchase in a single transaction, the less the "cost per unit" you will pay. The exact sliding scale can vary and may sometimes be negotiable for larger purchases. Compare each broker and read the fine print within contracts. Pick the one that best meets your buying and selling style.
Account fees – Look for hidden fees in account contracts within the terms and conditions. I know of one broker who requires an extra $10 to transfer money out of an account "quickly" as against withdrawing money normally. Hardly a fair fee, I’d say. All fees should be listed in the terms and conditions listed in opening an account.
Phone access – Online services can go down during hours of service. Interruptions to broadband services, power outages and computer problems can stop you from accessing information you need at critical points. This is why you must have phone access to your online broker. Do not even consider using an online broker if they do not provide phone access.
Access to your money – I prefer having instant access to my money even though it is held in a cash account by the broker. Most brokers will have a cash account facility that is linked to your trading account. My account is linked to a MasterCard account, which means I can access that money anytime through any ATM or make purchases as I would normally using a MasterCard. Don’t be misled into thinking you must only have a separate cash holding account with the online broker. There are lots of options open to you as a client and good online brokers will provide several options for your cash holding account.
Extra benefits – seek out those brokers that give you extra incentives to open an account with them. Some offer a limited free brokerage period. Others will offer free reports on the markets you are interested in. These bonus offers can help you getting you account established and setup a profitable trading account. For more information on finding the best online stock broker feel free to visit our website.
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*All articles herein have been reproduced with permission and may not be copied, reproduced, or distributed in any fashion or through any channel without the explicit consent of the Author and/or the source of each article.
- Mr. Sharath Sury neither agrees or disagrees with the following authors' views or beliefs, nor does he endorse or guarantee any of the information or stories contained in this section. On occasion, Sharath Sury may have only heard the headline of the story, casually indicating that others may find the topic(s) interesting. To reassert, Mr. Sury has simply indicated that articles may be worthy of discussion.
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The Quantitative Trading Strategies article was VERY interesting! More like this please!
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