An American investment bank pulled out from its physical commodity trading activity due the new regulation. Its proprietary trading desk was given the task of expanding its trading activities to cover commodity futures contracts.
Pairs trading strategies are market-neutral long/short trading strategies designed to exploit short-term deviations from a long-run equilibrium pricing relationship between two assets. Typical pairs trading strategies include:
Co-integration is not the same as correlation:
Typical questions which must be answered when developing a pairs trading strategy include:
From a risk management perspective, it is also important to specify maximum
allowable time to maintain open trading positions, maximum allowable Value at Risk (VaR), and further possible risk reducing measures such as stop-loss triggers.
We use the Johansen test for co-integration to select trading pairs:
We focus on trading pairs exhibiting:
The main risk exposure to commodity specific events:
Trading and risk management rules should be defined and adhered to as follows:
We have the skills and experience to support you in:
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