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 Intro and summary 2 BO vs IJ 3 BO vs SH 4 BO vs SH 5 C vs CRD 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 XB 20 C vs YW 21 CRD vs YW 22 cattle roi 23 China S crush 24 CC vs QC 25 CO vs CL 26 crack 321 27 crack 532 28 crush 29 DAE vs XB 30 DF vs KC 31 EP vs CA 32 HO vs BO 33 HO vs XB 34 IJ vs RS 35 RS vs S 36 KO vs BO 37 KW vs EB 38 KW vs MW 39 KW vs RR 40 LH vs LC 41 LS vs LC 42 QK vs CA 43 RS crush 44 RS Oil vs BO 45 RS vs BO 46 RS vs KO 47 S vs SY 48 SB vs DL 49 SB vs QW 50 SB vs CB 51 W vs CA 52 W vs EB 53 W vs KW 54 W vs MW 55 W vs S 56 XB vs DL 57 XB vs SB 58 YW vs WZ 59 SM vs AE 60 S vs AK 61 S vs AK 62 KO vs PAL 63 KO vs SH 1 Intro and summary This document shows how we think about the sizing of all the relative trades.