Two things must be kept in mind when establishing a long position in this kind of hedge. First, since Treasury bond futures contractsrepresent face value of $100,000 worth of Treasury bonds, the investor will want to go long approximately $100,000 worth of closed-end bondfunds. When it comes to trading closed-end bond funds, I do not recommend buying more than 2000 or 3000 shares of a single fund for a short-term trade. That is why we would go long several different closed-end funds, representing positions of from $31,000 to $34,000 and amounting to approximately $100,000. That $100,000 long position offset the short position of 1 September U.S. Treasury bond futures contract at 100.18, priced at a 7.943 yield.
On February 10, 1978, with the Dow Jones Bond Average down to 89.79, two significant changes had taken place since we established our theoretical long and short positions: (1) The long positions in the bond funds had become profitable, and (2) so had the short position in the Treasury bond futures contract. For example, JHS was selling at 175/8, up from 167A; DBF was up to 165/8 from 161/2; and PAI had gone from 135/8 to 1334. The net asset values of all three funds had declined but the discounts, as predicted, narrowed more than the decline in net asset values, resulting in the profits. Read the rest of this entry »
Currency swap: Contract that commits two counterparties to exchange streams of interest payments in different currencies for an agreed period of time and to exchange principal amounts in different currencies at a pre-agreed exchange rate at maturity.
A currency swap has three stages:
An initial exchange of principal: the two counterparties exchange principal amounts at an agreed exchange rate. This can be a notional exchange since its purpose is to establish the principal amounts as a reference point for the calculation of interest payments and the re-exchange of the principal amounts.
Exchange of interest payments on agreed dates based on outstanding principal amounts and agreed fixed interest rates.
- Re-exchange of the principal amounts at a predetermined exchange rate so the parties end up with their original currencies.
- Again this may be done to hedge risk, to speculate on changes in exchange rates, or to attempt to lower the cost of borrowing by borrowing in the currency in which the most favourable interest rates are available and then swapping into the currency that the firm needs to carry out its business. Whether this will be cheaper will depend among other things on the bid—offer spread.
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You need to be concerned with the psychological aspects of investing in a managed futures program from two distinct points of view. First, what type of investment best meets your needs? And second, if you’re going to personally interview and select a CTA, what psychological characteristics should you be looking for?
The type of futures investment you are suited for depends on your attitude toward risk. If you are an aggressive risk-taker, you might be looking for an emerging CTA with a short, but incredible, track record. A moderate risk-taker might select a seasoned trader with a five- to ten-year track record in the moderate volatility range. Safety-conscious investors prefer to define their maximum risk in advance. They look for limited partnerships and “guaranteed” funds. We’ll have a discussion of the various types of offerings later in this text. Read the rest of this entry »
There are a few other sticky wickets, or Macro-Disqualifiers fund administrators must negotiate. For example, a fiduciary must’ act solely in the interest of participants and beneficiaries and keep expenses to the minimum. Additionally, the fiduciary is prohibited from self-dealing, acting as a party with a competing or adverse interest in the plan, and receiving any compensation from any other party other than the plan. In other words, neither the FCM nor the trading manager should be named as a fiduciary. Both of these entities are expected to cross-trade (represent both sides of a futures trade by brokering for customers who are long and others short), work on an incentive fee basis (a conflict of interest with the pension fund), and provide a variety of services with compensation from multiple sources—all in the normal course of one business day. Read the rest of this entry »
For the fourth scenario, we chose a qualified pension plan for the following reasons:
- A lot of very well-known companies are adding managed futures to their investment portfolios for the reasons already documented in this book, particularly because they can often increase the overall return while reducing risk. For example, some of the corporations currently using managed futures are Intel, Libby Owens Ford, Weyerhauser, World Bank, and Virginia Supplemental Retirement System.
- These plans are highly regulated by the Department of Labor, IRS, SEC, CFTC, and state banking, insurance, and securities agencies. All these organizations scrutinize the investment practices of these plans for the protection of the employees who invest. If managed futures can pass the muster of all this regulatory oversight, there must be something worth consideration for just about every serious investor.
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Earlier we provided two interpretations of a swap: (1) a package of futures/forward contracts, and (2) a package of cash market instruments. The swap spread is determined by the same factors that influence the spread over Treasuries on financial instruments (futures/forward contracts or cash) that produce a similar return or funding profile. As we explain subsequently, the key determinant of the swap spread for swaps with maturities of five years or less is the cost of hedging in the Eurodollar CD futures market. For longer maturity swaps, the key determinant of the swap spread is the credit spreads in the corporate bond market. Read the rest of this entry »
Posted on February 9th, 2008 in IMF | 3 Comments »
Whatever the explanation for the forward rate bias and whatever the reason for its persistence, we hope that the forward rate bias will continue to exist well into the future. Armed with this evidence, how can tradable profits be realized? The easiest way to trade the forward rate bias is to use currency futures. Futures contracts can be easily bought or short-sold, are easy to cancel, and have low trading costs. On the other hand, forward contracts are restrictive and difficult to cancel. The pricing of forward contracts and futures contracts is almost identical, so the trading profits will also be equivalent. The trading strategy consists of buying the currency with the highest interest rate and unwinding the position a month later. A one-month holding period is chosen because the forward rate bias is most prominent for shorter periods. The following steps are taken in choosing and executing the strategy. Read the rest of this entry »
Hong Kong - the Securities and Futures Ordinance enacted in March 2002 and operational from April 2003, combined into a single ordinance all previously existing ordinances for the regulation of the securities and futures markets, principally the 1974 Protection of Investors Ordinance and the Securities Ordinance. Hong Kong also has a series of Codes, the first of which - the Code on Unit Trusts - was enacted in 1978, when the Committee on Unit Trusts was formed to administer the Code. Read the rest of this entry »
