I’ve been experimenting with lot sizing for this ring, not trying to be perfectly hedged, but wondering if a bias toward a faster moving pair/currency would allow for some opportunity to capture a portion of short term spikes in the faster moving currency.
I’m sure this has concept has been negated countless times, but hey, it’s part of my learning curve. :o
There is no point in biasing the ring towards any currency, as then you may as well just trade the currency pair directly that you are biasing. This is a highly inefficient way of doing that as you will pay triple spread and commission for the trade.
In terms of the arbitrage opportunities that you are looking for, there is extensive material on the intenet about this…try googling “The Impeccable Hedge”
Thanks - but I actually read through most of the 70 pages of that thread and it never seemed clear to me.
I agree that there would be extra spread costs to cover, but if there is a time/speed/responsiveness angle to play, it could overcome the spread costs…in theory.
The lot sizes i mentioned in the example do not make a perfect hedge, it is slightly biased to one currency. I want to know how to calculate which currency it is and by what amount.
As Nack noted, you have to look at comparative values. We cannot just which side of the triangle is bigger without knowing the rates - at least two of them, anyway.
There is no such thing as “pair value”. A currency quote is the value of one currency expressed in terms of another. EUR/USD is the value of the EUR expressed in terms of USD.
What you are calculating above is position value. If EUR/USD is 1.40 and you’re trading a 0.1 lot then the position is worth 10,000 EUR or 14,000 USD.
First of all, if EUR/USD is 1.37605 and USD/CHF is 1.05815 then EUR/CHF must equal 1.45607 (taking out spreads at this point). That’s the triangular arbitrage.
As for your positions, if you’re short 0.13 EUR/USD at 1.37605 that means being short 13,000 EUR and Long 17,888.65 USD.
If you’re short 0.10 USD/CHF at 1.05815 that means being short 10,000 USD and Long 10.581.50 CHF.
When you add that up you’re short 13,000 EUR, Long 7,888.65 USD (17,888.65-10,000), and Long 10,581.50 CHF.
Because you’ve got 3 currency exposures you cannot completely offset them with any one other pair position. You’d be left with something uncovered. For example, if you wanted to offset your EUR exposure you could buy 0.13 EUR/CHF. That would offset the 13,000 EUR short. It would mean selling 18,928.91 CHF (13,000 x 1.45607), which leaves you with a 8347.41 CHF short, and of course still the 7888.65 long USD. Notice that 8347.41/7888.65 is 1.05815, so you’d have to sell 0.0788865 of USD/CHF to get all the way back to neutral.
