Introduction In this write-up we study the historical optimal hedging ratio for the KW vs CA spread. This work follows from previous research on the optimal hedging ratio of the C vs S spread.
The table below gives the contract specifications of KW and CA. Notice that the tons per contract is basically equivalent, i.e. when sizing up the positions on a ton for ton basis we make use of a one to one ratio.
Introduction When a simple question does not have a simple answer it might point to something interesting that is worth threading out. The simple question we attempt to solve deals with how to size up a relative value futures pairs trade so that it gives the best risk adjusted return. A couple examples we will consider include
Ton for ton Equal notional exposure Equal volatility adjusted notional exposure Equal (at the money) implied volatility adjusted notional exposure Hedging ratio from cointegration test Machine Learning solution We also explore the possible evolution of the hegding ratio as a function of fundamentals or seasonal input features, or even the shape of the futures curves of the underlying commodities.
1 Introduction 2 AC vs AK 3 BO vs IJ 4 BO vs SH 5 C vs CA 6 C vs CT 7 C vs CUA 8 C vs DL 9 C vs EP 10 C vs FC 11 C vs KW 12 C vs LC 13 C vs LH 14 C vs MW 15 C vs RR 16 C vs S 17 C vs SB 18 C vs W 19 C vs YW 20 CC vs QC 21 CL vs CO 22 CO vs CL 23 China RS crush 24 China S crush 25 DA vs CHE 26 DF vs KC 27 EP vs CA 28 HO vs BO 29 HO vs XB 30 IJ vs RS 31 KO vs BO 32 KO vs PAL 33 KO vs SH 34 KW vs CA 35 KW vs MW 36 KW vs RR 37 LH vs LC 38 PAL vs SH 39 PAL vs ZRO 40 RS crush 41 RS vs BO 42 RS vs KO 43 S vs AK 44 SB vs CB 45 SB vs DL 46 SB vs QW 47 SH vs ZRO 48 SM vs AE 49 SM vs S 50 W vs CA 51 W vs KW 52 W vs MW 53 W vs S 54 XB vs CUA 55 XB vs DL 56 XB vs SB 57 YW vs WZ 58 ZRR vs AE 59 cattle roi 60 crack 321 61 crack 532 62 crush 63 Remarks 1 Introduction Following the results of the Sugar Spread and Curve Structure post we determine similar plots that show the returns and roll yields of a collection of different inter-commodity spreads we are interested in.
1 Introduction 2 Roll Adjusted Prices 3 The Role of Roll Yield 4 Sugar Spread Volatility vs Roll Yield 5 Remarks 1 Introduction The raw-refined sugar spread, SB vs QW, is one of our bread and butter processing margin trades. Raw sugar in the form of sugar cane or beets have to be refined to get the normal white sugar we are all used to. In the Sugar Trading Manual - Cost of production the author adds a fixed cost of USD 65/t which equates to their estimate of the world average cost of upgrading raw sugar to refined sugar in autonomous refinerries.
1 Introduction 2 Explore the Roll Yield 3 Simple Model 4 Comments 1 Introduction The aim of this write-up is to give some proof of principle results on extracting P&L from the difference in roll yield between two correlated commodities. We define the roll yield as the daily compound return that changes the further dated contract price to the near dated contract price. Mathematically we write