FPI - Fractional Product Inefficiency: The Impeccable Hedge

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FoxerFX
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Postby FoxerFX » Mon Feb 12, 2007 10:12 am

pipscalper wrote:FoxerFx, based on the 02/09/07 closing prices, my calculations came to the following:

Short 100K EUR/USD
Short 130135 USD/CHF
Long 100K EUR/CHF

However, I still doubt that there is no exposure because as the rates change so are the ratios. Anyways, it is close enough.

My main problem is that I do not know how to combine all 3 pairs into a one line, live chart. Can it be done on MT4 charts or some other charts?

Thank you for any hint or suggestion.


Try to chart following difference: short eur/usd* short usd/chf - long eur/chf = x,
when x will be higher than 0.0 or the greater the better than it is arbitrage time, this difference will be completely mean reversion process.
If you calculate properly amount of usd/chf to short, your portfolio will be completely hedged and will have small varying exposure which will fluctuate in certain range and it also will be mean reverting process.

Regards

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pipscalper
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Postby pipscalper » Tue Feb 13, 2007 4:05 am

Stevensign wrote:
pipscalper wrote:I use MetaTrade4 demo platform. Maybe that's why the indicator comes out blank?

i did a fresh install of Metatrader 4 from Metaquotes.net. The indicator came up fine for me. Are you sure you scrolled all the way the to right?
Stevesign, thank you for your patience. I got it to work! It's great, working smooth. I uninstalled and reinstalled MT4 platform, and it fixed the problem.

Again, thank you.

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Postby pipscalper » Tue Feb 13, 2007 4:24 am

FoxerFX wrote:
pipscalper wrote:FoxerFx, based on the 02/09/07 closing prices, my calculations came to the following:

Short 100K EUR/USD
Short 130135 USD/CHF
Long 100K EUR/CHF

However, I still doubt that there is no exposure because as the rates change so are the ratios. Anyways, it is close enough.

My main problem is that I do not know how to combine all 3 pairs into a one line, live chart. Can it be done on MT4 charts or some other charts?

Thank you for any hint or suggestion.


Try to chart following difference: short eur/usd* short usd/chf - long eur/chf = x,
when x will be higher than 0.0 or the greater the better than it is arbitrage time, this difference will be completely mean reversion process.
If you calculate properly amount of usd/chf to short, your portfolio will be completely hedged and will have small varying exposure which will fluctuate in certain range and it also will be mean reverting process.

Regards

FoxerFX, thank you for the clue. I will definetely do some calculations, it may take sometime though...

I do not understand why the arbitrage is better when x is higher than 0.0. Isn't zero exposure or 0.0 diference is the ultimate equilibrium ensuring the smallest fluctuation?

FoxerFX
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Postby FoxerFX » Tue Feb 13, 2007 8:50 am

pipscalper wrote:
FoxerFX wrote:
pipscalper wrote:FoxerFx, based on the 02/09/07 closing prices, my calculations came to the following:

Short 100K EUR/USD
Short 130135 USD/CHF
Long 100K EUR/CHF

However, I still doubt that there is no exposure because as the rates change so are the ratios. Anyways, it is close enough.

My main problem is that I do not know how to combine all 3 pairs into a one line, live chart. Can it be done on MT4 charts or some other charts?

Thank you for any hint or suggestion.


Try to chart following difference: short eur/usd* short usd/chf - long eur/chf = x,
when x will be higher than 0.0 or the greater the better than it is arbitrage time, this difference will be completely mean reversion process.
If you calculate properly amount of usd/chf to short, your portfolio will be completely hedged and will have small varying exposure which will fluctuate in certain range and it also will be mean reverting process.

Regards

FoxerFX, thank you for the clue. I will definetely do some calculations, it may take sometime though...

I do not understand why the arbitrage is better when x is higher than 0.0. Isn't zero exposure or 0.0 diference is the ultimate equilibrium ensuring the smallest fluctuation?


Ok, let's have a look at details:
at the market ask always larger than bid. When you try to make triangular arbitrage you have to pay 3 spreads for each of the currency pair involved in to the arb transaction, so, you need to compensate such payments at least to reach break-even P/L, but it will be better to make 0.5 or more pips of arb profit. So, when will monitore short eurusd * short usdchf - long uerchf =x, you 'll monitore difference of synthetic bid for eurchf - market ask for eurchf = x, and when x > 0 that means that bid larger than ask, and you should establish arb portfolio, this situation lasts from milliseconds till second or two, after that x - you synthetic spread between bid and ask will go to negative zone i.e. x < 0 where it will be for 98% of time, and when x will be enough negative to compensate 3 payed spreads and make some arb profit you should close your portfolio to lock arb profit. Mirrot situation you can monitore with short eurchf - long eurusd * long usdchf = x, and so on with other currencies. Try to figure out char with x movements for day or two , you 'll see mean reverting process and also amplitude of such movements, how often x > 0 and so on. You exposure will not be 0, it will be small.
That's the receipt :) but make accurate calculations and verify their correctness.
By the way, are you from Ukraine?
I'm from Kyiv.

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michal.kreslik
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Postby michal.kreslik » Tue Feb 13, 2007 10:37 am

Stevensign wrote:I have heard that the "Interbank sytstem" only trades standard lots ($100,000) and if you're not trading whole standard lots, then you HAVE to go through a dealing desk, period! While the IB you go through may deny this, the banks they deal through have to do this. So, ALL IBs have dealing desks UNLESS you trade in standard lots. Please correct me if I'm wrong.


Well actually I don't care about how exactly my order is handled as long as it's interbank quoted (with no markups). EFX allows you to set the position size with the precision down to one unit of currency and at the same time they deliver interbank quote feed, which is a good combination of both worlds.

Obviously, the CurreneX order interface for NeoTicker (which I'm gonna start working on when my automated FPI framework is ready) will be the ideal solution.

Stevensign wrote:]I was hoping to make money on interest but that doesn't look like it will work. Sad


There is a way on how to make FPI work with interest :)

Michal

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michal.kreslik
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Postby michal.kreslik » Tue Feb 13, 2007 10:52 am

pipscalper wrote:OK, here is my 2 pips... In the real world, this impeccable hedge positions, or as I like to call it synthetic crosses, are not such a "futile hedge" after all. Synthetic crosses, or "impeccable hedges" like EUR/USD, USD/JPY, EUR/JPY or GBP/USD, USD/JPY, GBP/JPY or EUR/USD, USD/CHF, EUR/CHF can flacuate 50-100 pips and can stay 50-100 pips up or down for months!


No, if the FPI ring is correctly position sized, it can't fluctuate in 50 - 100 pips. Also, it's not exact to relate the fluctuation to "pips" - what currency pair's pip do you mean? All pips are not created equal. The fluctuation is going to be in a very small range, back and forth, which creates the edge for FPI.

pipscalper wrote:So, what I am trying to say is that this "impeccable hedge" is not the same as bying EUR/USD and selling EUR/USD at the same time. You DO EXPOSE YOURSELF TO MARKET RISK, however, the risk is much smaller and limited. Plus, there are unknown factors such as synthetic pairs getting out of balance...


They can't get "out of balance" in the meaning you probably do have on your mind. It's the same as if you said that at one exchange office, you will get GBP for 2 dollars and at some other one you will get it for 1 dollar. Such an imbalance can't last.

However, FPI takes advantage of microscopic, Brown-motioned imbalances.

Michal

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Re: FPI - Fractional Product Inefficiency: The Impeccable He

Postby michal.kreslik » Tue Feb 13, 2007 11:05 am

FoxerFX wrote:1. you have reinvented the wheel which has name - triangular arbitrage at FX market;


For the first time, I posted FPI in 2005 on Rob Booker's website.

Secondly, I think that virtually anything that anyone comes up with has already been done by someone else before.

Last but not least, Triangular arbitrage is only one of the applications of FPI as FPI is more universal. In any case, I'm not paid by my clients for a system being original, but for a system being profitable :)

2. you are right that with 3 currency pair you can create fully hedged portfolio, but you should properly calculate amount of third currency pair to make portfolio hedged, and thats why Oanda is ideal for such puproses as it allows to trade any amount of curency


That's right and it has been discussed extensively in this thread before. I'm using EFX where it's possible to size the position down to one currency unit, too.

3. it will not work on that brokers which allows to trade only full lots or minilots because you will have exposure and portfolo will not be hedged


That's sure and it has been discussed here before, too.

4. instead of monitoring Eur/usd*usd/chf*eur/chf=1 try to monitore short(eur/usd*usd/chf) - long(eur/chf)=x or wise versa and so on, it will give better signals for entries and exits


There are many ways on what exactly to monitor with an FPI scanner. There are actually a couple of billion combinations.

5. it will not work on 15 minutes charts only on tick data


Imagine that! :)

6. this type of acitivity is being prohibited by all brokers, even Oanda


I agree, but there are ways on how to work around this.

7. if you want to trade this idea it will be better to trade it through several brokers for masking of this activity and increasing of numbers of such opportunities (Oanda will be best for doing hedge positions in third currency)


That's one of the options available.

8. the more you will hold you arb portfolio the more it will lose arb profit due to negative interest on all 3 currencies.


Unless you know how to take care of the interest rate issue with FPI ring.

10. This idea will not work for retail traders, but hedge funds explore it very much due to presence of good infrastructure and fast execution.


I'd rather say it won't work with "retail brokers".

Try to link this idea to 3 brokers with one of them being Oanda.


There exist better combinations.

Michal
Last edited by michal.kreslik on Tue Feb 13, 2007 11:08 am, edited 1 time in total.

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Postby Stevensign » Tue Feb 13, 2007 11:08 am

michal.kreslik wrote:
Stevensign wrote:I have heard that the "Interbank sytstem" only trades standard lots ($100,000) and if you're not trading whole standard lots, then you HAVE to go through a dealing desk, period! While the IB you go through may deny this, the banks they deal through have to do this. So, ALL IBs have dealing desks UNLESS you trade in standard lots. Please correct me if I'm wrong.


Well actually I don't care about how exactly my order is handled as long as it's interbank quoted (with no markups). EFX allows you to set the position size with the precision down to one unit of currency and at the same time they deliver interbank quote feed, which is a good combination of both worlds.

Obviously, the CurreneX order interface for NeoTicker (which I'm gonna start working on when my automated FPI framework is ready) will be the ideal solution.

Stevensign wrote:]I was hoping to make money on interest but that doesn't look like it will work. Sad


There is a way on how to make FPI work with interest :)

Michal

I don't know about CurreneX , but EFX does have a dealing desk, I'm closing my live account with them. EFX looks good initially but they "get you" when you exit.

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Postby michal.kreslik » Tue Feb 13, 2007 11:11 am

Stevensign wrote:
michal.kreslik wrote:
Stevensign wrote:I have heard that the "Interbank sytstem" only trades standard lots ($100,000) and if you're not trading whole standard lots, then you HAVE to go through a dealing desk, period! While the IB you go through may deny this, the banks they deal through have to do this. So, ALL IBs have dealing desks UNLESS you trade in standard lots. Please correct me if I'm wrong.


Well actually I don't care about how exactly my order is handled as long as it's interbank quoted (with no markups). EFX allows you to set the position size with the precision down to one unit of currency and at the same time they deliver interbank quote feed, which is a good combination of both worlds.

Obviously, the CurreneX order interface for NeoTicker (which I'm gonna start working on when my automated FPI framework is ready) will be the ideal solution.

Stevensign wrote:]I was hoping to make money on interest but that doesn't look like it will work. Sad


There is a way on how to make FPI work with interest :)

Michal

I don't know about CurreneX , but EFX does have a dealing desk, I'm closing my live account with them. EFX looks good initially but they "get you" when you exit.


As far as for me, I'm not getting "got" :) by EFX, but definitely, CurreneX is the way to go.

Michal

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Postby michal.kreslik » Tue Feb 13, 2007 11:15 am

pipscalper wrote:It's the same one line chart that Michael K. has on the first page of this topic.


Hey I'm not being picky, however my first name, correctly spelled, is "Michal". Pronounced "Mik-hal" :lol:

Someone suggested I should record that and post it as mp3 here, so maybe I should go for it :lol:

Michal

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