FPI - Fractional Product Inefficiency: The Impeccable Hedge

NeoTicker indicators

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michal.kreslik
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Postby michal.kreslik » Tue Feb 13, 2007 11:20 am

FoxerFX wrote:Short 100K EUR/USD
Short 100K USD/CHF
Long 100K EUR/CHF

if you will open above positions you will have exposure on USD currency and you arb portfolio will not be hedged and P/L of this potfolio will not move from -1 to +1


It's not the P/L but the fractional product that's wiggling around the mean value. Also, there are four different ways on how to calculate FPI and each of that will produce a different set of product values.

Michal

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Postby michal.kreslik » Tue Feb 13, 2007 11:32 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.


The FX quotes = rates = ratios. When one ratio comes up, the other must inevitably come down. Aside from numerous other aspects, from this simplistic point of view you neither gain nor lose.

Imagine that as a seesaw: the average height above ground of the two people on the seesaw is still the same no matter what's the particular position of any one of them:



Anyways, it is close enough.


No, it's not wishy-washy. It's exact.

Michal :lol:

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Postby michal.kreslik » Tue Feb 13, 2007 11:39 am

pipscalper wrote:Short 100K EUR/USD; entry price 1.30135
Short 130135 USD/CHF; entry price 1.2473
Long 100K EUR/CHF; entry price 1.6233

I know it is not 100% hedged and there is some exposure to the market. But no pain, no gain. Some exposure also means opportunity...


With FPI, any exposure rather means uncertainty.

Uncertainty is bad for FPI investor.

I consciously use the term "investor" as FPI is more of an investment than a trading vehicle.

Michal

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Postby michal.kreslik » Tue Feb 13, 2007 11:46 am

pipscalper wrote: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?


FPI = 0.0 is not a difference, but a product.

Depending on one of the 4 FPI calculation schemes and a set of prices (Bids/Asks/Midpoints) you use, the FPI mean will be skewed to the right or to the left.

Michal

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Postby michal.kreslik » Tue Feb 13, 2007 11:52 am

FoxerFX wrote:Ok, let's have a look at details:
at the market ask always larger than bid.


Not always true. Have a look at the true Level II data feed and you'll find that the it happens that Bid >= Ask. I wrote a special strategy to take advantage of this ineffficiency for a quick clean profit.

Michal

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Postby pipscalper » Wed Feb 14, 2007 6:31 am

FoxerFX wrote:
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.
FoxerFX, yes, I am Ukrainian, but live in the states. My family, though, lives in Kiev. Do you actually live in Kiev? Your english is perfect.

P.S. I am still trying to figure out how to do the math and calculations of the arbitrage crosses. It's been really busy tax season at work, so I did not have a whole lot of time to think this thing through. But I am really hooked on the whole concept of arbitrage and hedging. You guys have been great help here. I appreciate it.

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Postby pipscalper » Wed Feb 14, 2007 6:47 am

michal.kreslik wrote:
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
Pardon mua, Michal; did not pay attention :oops:

Just currious, what country are you originally from? Your last name sounds Eastren European.

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Postby michal.kreslik » Wed Feb 14, 2007 8:16 pm

pipscalper wrote:
michal.kreslik wrote:
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
Pardon mua, Michal; did not pay attention :oops:

Just currious, what country are you originally from? Your last name sounds Eastren European.


Does it? :) Well that's probably because I'm from the Czech Republic :)

Michal

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Postby xstek » Wed Feb 14, 2007 8:18 pm

Also, I'm planning to write a Currenex order interface to NeoTicker. I will implement the FIX interbank protocol in that.

Michal


Michal, if and when you finish the Neoticker "data/order server" or interface for neoticker, could you PM me, I would be interested in purchasing said interface or a license. Also, retail traders usually do not get the roll interest from CurreneX access, the White Label provider usually ("takes care") of that, in other words no interest paid or taken..


XSTEK

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Postby jfx2 » Sat Feb 17, 2007 12:19 am

Michal, if and when you finish the Neoticker "data/order server" or interface for neoticker, could you PM me, I would be interested in purchasing said interface or a license. Also, retail traders usually do not get the roll interest from CurreneX access, the White Label provider usually ("takes care") of that, in other words no interest paid or taken..


XSTEK



XSTEK, Just to be clear for others reading this....CurreneX is a software platform connecting buyers and sellers. They don't pay or charge interest because they are not clearing or holding any contracts. CurreneX is not a solution to the interest rate problem with holding FPI positions, which is not even a problem if its accounted for in the strategy. If you want to trade on the curreneX system you will need a brokerage relationship which will charge/pay interest when they clear/roll your contracts.

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