Trading Strategies For Tactical Portfolio Allocation

The Chicago Board of Trade offers a futures contract on long-term Treasury bonds. Characterize the investors likely to use this contract.

I help dynamic women, who have decided to take control of their financial lives. They are smart and successful in their lives and careers. Many of them have either received an inheritance, a divorce settlement, or simply have accumulated their own wealth. What is interesting is that it does not matter how they came into money, they typically all share the same three concerns:

Definition: In an active portfolio strategy, a manager uses financial and economic indicators along with various other tools to forecast the market and achieve higher gains than a buy-and-hold (passive) portfolio.

Question 4: Who, in addition to security dealers, would you expect to engage in index-futures arbitrage?

The premise of an efficient market is that stock prices adjust accordingly as information is received. The speed and accuracy of the pricing changes are a reflection of the strength of the market efficiency, where in theory a perfectly efficient market will re-adjust prices immediately and precisely with new information. The efficient market hypothesis aligns with beliefs about whether technical and fundamental analyses are useful in making investment decisions or whether a passive approach is appropriate. In a perfectly efficient market, these types of analyses are not able to predict stock price trends (based on market inefficiencies or price abnormalities) which could assist in portfolio positioning or investment management. However, some investors belive that the market pricing is not precise and that there are timing windows and pricing trends that can be identified through analysis of past performance and finding price abnormalities where all information is not correctly reflected in the stock price (Hirt, Block and Basu, 2006).

Given the background of airline risk exposure and risk management practices, it is apparent that airlines have a variety of options available to minimise fuel price risk. Most of their hedging activity involves over the counter (OTC) instruments which are largely unregulated and difficult to study. Market activity in futures exchanges presents a safer option whose activity is monitored and regulated. The rest of the paper focuses on Southwest Airlines’ hedging activity for the years 2000 – 2014. We look at real life application of futures markets and their products as a risk management technique for a U.S. commercial airline and evaluate whether hedging adds value.

Red Rock Capital’s strategy is to identify major capital flows that manifest themselves as sustainable price trends regularly occurring around the globe. The firm is operated by two people, Tom Rollinger and and Scott Hoffman, both men own 10% or more financial interest in their fund. The two of them are investing their own capital in the fund and they believe that managing money for clients via CTA is an extension of what they are already doing. It proves that they believe in what they are doing and is a good selling point for potential investors. Scott Hoffman started trading futures with Red Rock Capital Management in 2004, since then he has been developing and analyzing sophisticated algorithmic execution models that minimize transaction costs for Red Rock Capital’s quantitative strategies, explaining in part why their management fee is lower than the industry average.

Over the past decade, the ability of large financial institutions to accurately predict changes in the price of financial securities by using advanced technology has increased exponentially (Bloomberg). Specifically, the introduction of affordable geospatial satellite imagery has enabled investment managers to estimate crop yields, oil supply, and livestock quantities with low margins of error. This information is used to inform trading decisions, which often result in large profits (Woyke). While extremely useful, this technology is only available to a select number of institutions, as they have signed exclusivity and pricing agreements with the technology firms providing the data. These agreements prevent small investment funds and

Futures and options contracts are the two exchange-traded derivatives contracts in the financial market that can be used to manage Alkane’s risks.

However, with the passage of time, people’s understanding of the role of financial derivatives gradually deepening, hedge funds in recent years, favoured because hedge funds have the ability to make money in the bear market. From 1990 to 2002, ordinary public funds lost an average of 11.7 per cent a year, while hedge funds earned 11.2 per cent a year during the same periods. There are some reasons for hedge funds which got such impressive results in surveys, and the benefits they receive are not as easy as the outside, and almost all hedge fund managers are excellent financial brokers.

When thinking about financial institutions and how I can implement what I had learned, the first topic that came to mind was stocks, bond, wall street. The thought that there is a lot of money that can be made there peaked my interest ergo, this book written by Peter Lynch was intriguing. Because the amount of knowledge I know about Wall Street is insignificant, the understandings and experience of Mr. Lynch have been useful in my endeavors to acknowledge the rules that make up the trading rooms and actions people make in order to stay ahead of the market. Though this book covers just one opinion of many in the end, his expertise will only benefit partially

The author considered a case when only a single risky asset is available for investment and only one variable has predictive power over the risky asset return. For the risky asset, he considered a long-term US Government bond portfolio and a portfolio of US stocks. To compute the returns he employed a one-month Treasury bill rate of 4.32%. In his findings, he concluded that under return predictability the risk-return characteristics of each risky asset can either improve or worsen with the investment horizon.

Commodities futures act as a way to speculate on the value of a commodity before it is brought into market. Reacting heavily with global macro events, commodities can be volatile and can result in great gains as well as great losses. Pricing of each commodity is directly related with supply and demand. Commodities also offer the opportunity to buy a good without having intrinsic value attached. With a stock there is an added value from brand name or the name of the producer as Karl Marx says, “"From the taste of wheat it is not possible to tell who produced it, a Russian serf, a French peasant or an English capitalist." (Marx).

Futures Market: Over the course of this semester I followed the July corn futures market. Throughout my time spent tracking the futures market corn prices remained low as compared to previous years. From January 18, 2016, to April 22, 2016, prices remained steady around the $3.00 range. This was a result of various market developments which took place throughout the past four months. A major factor that affected prices frequently was the weather. Agriculture depends heavily on weather and as a result the futures corn prices were affected. Increases in U.S. corn prices took place whenever other major corn producing countries experienced bad weather. If the U.S. predicted hazardous weather, prices also increased because it likely took a toll on the overall production. Another major development that affected the U.S. futures prices dealt with the value of the U.S. dollar. As the value rose compared to other currencies, futures prices dropped. This was due to export decreases and as a result the supply within the United States increased, causing futures prices to fall. However, when the value of the dollar decreased U.S. futures increased. As a result, other countries demanded more U.S. corn, leading to increased futures prices. The USDA releases reports that impact U.S. futures prices. Within these reports expected numbers of production, yields, and various other factors are calculated, which greatly impact the U.S. futures

Questions pertaining to the impact of derivative trading on cash market volatility have been empirically addressed in two ways: by comparing cash market volatilities during the pre-and post-futures/ options trading eras and second, by evaluating the impact of options and futures trading (generally proxied by trading volume) on the behaviour of cash markets. The literature is, however, inconclusive on whether introduction of derivative products lead to an increase or decrease in the spot market volatility. One school of thought argues that the introduction of futures trading increases the spot market volatility and thereby, destabilises the market (Cox 1976; Figlewski 1981; Stein, 1987). Others argue that the introduction of futures actually reduces the spot market volatility and thereby, stabilises the market (Powers, 1970; Schwarz and Laatsch, 1991 etc.). The rationale and findings of these two alternative schools are discussed in detail in this section. The advocates of the first school perceive derivatives market as a market for speculators. Traders with very little or no cash or shares can participate in the derivatives market, which is characterised by high risk. Thus, it is argued that the participation of speculative traders in systems, which allow high