Saxo Bank
Saxo Bank A S www.saxobank.com is a modern investment bank specializing in online investments in the international capital markets. The company was founded in 1992 and became a licensed bank in 2001. Saxo Bank is headquartered in Copenhagen, with operating offices in London, Singapore, Marbella Spain , Geneva, and Zurich. Saxo Bank acts as a facilitator and enables clients to trade currencies, shares, CFDs, futures, options, and other derivatives as well as manage their portfolios via its...
Chapter Addendum
Let me share with you some vital research that has affected the world's Olympic teams since 1972 and will influence your trading and your life. Around 1952, several universities decided to study how to increase the effectiveness of various methods of improving athletic performance. Athletic performance was chosen because slight differences can be easily measured. For example, if a sprinter has been running the 100-meter dash for years, and, because of a training-method change, the sprinter's...
Cot The Big Deal
When analyzing historical currency prices, we are limited to five variables - i.e., the opening price, high, low, closing price, and volume in a time series hourly, daily, weekly, etc. The same holds true for futures, with the exception that there is also the element of open interest, which is the total of all futures and or open contracts entered into - not yet offset by a delivery, exercise, or transaction. The aggregate of all long open interest is equal to the aggregate of all short open...
Price Break Charts and the Global Financial Crises
The global financial crises, preceded by subprime market problems and precipitated by the Lehman Brothers collapse, caught the markets and experts by surprise. The magnitude of the collapse in conditions was unprecedented. A closer look at the evidence shows that the signs were detectable, particularly with price break charts. Price break charts also can be a useful tool for detecting key changes in financial conditions and monitoring the status of a recovery. Price break charts can help...
EXAMPLE 56 The Expected Number of Defaults in a Bond Portfolio
Suppose as a bond analyst you are asked to estimate the number of bond issues expected to default over the next year in an unmanaged high-yield bond portfolio with 25 U.S. issues from distinct issuers. The credit ratings of the bonds in the portfolio are tightly clustered around Moody's B2 Standard amp Poor's B, meaning that the bonds are speculative with respect to the capacity to pay interest and repay principal. The estimated annual default rate for B2 B rated bonds is 10.7 percent. 1. Over...
LufthansaDavis
On September 16, a fourth bidder emerged for the company. The German airline Deutsche Lufthansa AG and the California investor Marvin Davis jointly offered to buy or place 100 million of common stock and 300 million of debt in Continental Holdings, matching the previous offer by Air Canada Air Partners. Davis had recently tried unsuccessfully to acquire two other major airlines, Northwest and United. Lufthansa was one of the leading European carriers with 9 billion in annual revenues and had a...
More Formal Definition
A time series is mean-reverting if its returns have negative autocorrelation. Under this definition a below-average return in one period is compensated for by a higher-than-average return in subsequent periods. The VIX is mean-reverting under this definition. It has a daily autocorrelation of -0.04, weekly of -0.21, and monthly of -0.12. This model can be simply expressed as Rt p Rt-1 - f f aZt 3.1 Z is a draw from a standard normal distribution A realization of this process is given in Figure...
The Index Model and Realized Returns
We have said that the CAPM is a statement about ex ante or expected returns, whereas in practice all anyone can observe directly are ex post or realized returns. To make the leap from expected to realized returns, we can employ the index model, which we will use in excess return form as We saw in Section 10.1 how to apply standard regression analysis to estimate equation 10.9 using observable realized returns over some sample period. Let us now see how this framework for statistically...
You Ve Borrowed 20000 Margin Buy Shares Disney Now Selling
Creating winning traders for over 13 years The ST Trading Course You'll Ever Need Don't take our word for it, Listen to our students. Hear their stories on our website. Our award-winning Trading Course will teach you how to make smart trading decisions to help you become a successful trader You can place SMARTER, more PROFITABLE trades, experience smaller draw downs amp become MORE CONSISTENT with LESS effort -NO MATTER WHAT time frame or market you trade SIMPLE-EASY TO APPLY
Defining the Asset Class Where Does Microfinance Belong in the Investment
Strangely, key features of the microfinance investment universe have led some specialists to classify this asset class as money market plus. Key features that mis-leadingly suggest such a definition include little or nil volatility, like money market instruments predominately short term, with an average duration of 18 months, seldom exceeding the 36-month short term limit 4 the cash nature of the business with a high transaction turnover due to short duration and the low default record. For...
Call Spread
One of the most popular strategies is the call spread. A call spread involves nothing more than two calls, one with a low strike and another with a higher strike. An investor is said to be 'buying the call spread' if he buys the lower strike and sells the higher strike. 'Selling the call spread' means selling the lower strike and buying the higher one. Buying the call spread is called a 'bullish strategy' because the investor benefits if the underlying increases in value. However, the...
Figure 1 3
Source The Wall Street Journal, December 19, 2001. Often, creating a security that appears to be attractive requires the unbundling of an asset. An example is given in Figure 1.4. There, a mortgage pass-through certificate is unbundled into classes. Class 1 receives only principal payments from the mortgage pool, whereas Class 2 receives only interest payments. The process of bundling and unbundling is called financial engineering, which refers to the creation and design of securities with...
Market Rationality
In the prior sections we discussed the speed with which information is incorporated in hare price. We referred to this as informational efficiency. A number of authors are also concerned with whether prices accurately reflect investors' expectations about the present alue of future cash flows. We will refer to this hypothesis as market rationality to distinguish it from informational efficiency, while recognizing that some authors use the word efficiency to apply to both ideas. If markets...
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Exiting a Stock Investment
The stock market's extreme volatility during the start of the decade caused many investors who hold a single concentrated stock position with a low cost basis to explore strategies to reduce their exposure to the stock. Investors can eliminate or reduce the risk and reward of holding a single stock by Establishing a short against the box position Selling call options and buying put options Entering into an equity swap Entering into a forward contract Entering into a single-stock futures...
SanKu Three Gaps Up
As mentioned in Japanese candlestick analysis, the number three plays a very relevant part of the investment doctrine. Many of the signals and formations consist of a group of three individual signals. It has become a deeply rooted number for the Japanese investment community whether applied to Candlestick analysis or not. This creates a highly profitable investment strategy when applied to Gaps or Windows. San-ku provides the best opportunities for buying and selling at the optimal points in...
Estimate Revisions
Question 17.1. It is reasonable to expect that revisions in analysts' earnings forecasts can be used to attain above-benchmark returns. The preceding chapters have shown I hope unambiguously that today's stock prices reflect an amalgamation of uncertain expectations including uncertain estimates of future earnings. As more and more time passes, more and more of the uncertainty about coming earnings is resolved. For some companies, earnings expectations reach a level above the initial...
Cash Flow and Equity
If you want cash flow and equity, you have three options for building and attaining them Lease Option, Buy amp Hold, and Buy, Improve, amp Hold. In the game of cash flow and equity, an option that requires little or no money is the Lease Option. By the way, you can Lease Option In, Lease Option Out, or do both. Lease Option In is when you negotiate to lease a property from the seller usually for two to five years with the option to buy at the end of the period at a prenegotiated price. You may...
Capital Asset Pricing Model Sharpe Lintner And Mossin
Absence of arbitrage is a powerful economic principle for establishing relative pricing. In itself, however, it is not a market equilibrium model. William Sharpe in 1964 ,16 John Lintner in 1965 ,17 and Jan Mossin in 1966 ,18 developed a theoretical equilibrium model of market prices called the Capital Asset Pricing Model CAPM . As anticipated 60 years earlier by Walras and Pareto, Sharpe, Lintner, and Mossin developed the consequences of Markowitz's portfolio selection into a full-fledged...
Lets Trade This Deficit for That One
So, maybe the debt and budget deficit are okay. Maybe we even need more debt. And maybe people really are saving. But there are other headline-making, panic-inducing deficits giving investors frights principally the trade and current account deficits. The current account deficit consists mainly of the trade deficit, so let's focus on the trade deficit first. The trade deficit was 717 billion14 in 2005 EGAD Infinite gazillion bajillions . Freaks folks out particularly those fearful of a weak...
The Shape Of The Portfolio Possibilities Curve
Reexamine the earlier figures in this chapter and note that the portion of the portfolio possibility curve that lies above the minimum variance portfolio is concave while that which lies below the minimum variance portfolio is convex.8 This is not due to the peculiarities of the examples we have chosen but rather is a general characteristic of all portfolio problems. This can easily be demonstrated. Remember that the equations and diagrams we have developed are appropriate for all combinations...
The Capital Market Line
Given the preceding conclusion that the single efficient fund of risky assets is the market portfolio, we can label this fund on the T a diagram with an M for market. The efficient set therefore consists of a single straight line, emanating from the risk-free point and passing through the market portfolio. This line, shown in Figure 7 1, is called the capital market line. This line shows the relation between the expected rate of return and the risk of return as measured by the standard...
Using Key Zones
The challenge many traders face is determining which horizontal support and resistance levels have the highest probability of holding price versus which will fail. Although trend and price action have a lot of influence on selecting the right support or resistance level, there are some shortcuts you can use to quicken the process. Key support and resistance zones can be used to increase the probability price will respect the price level and offer you a good trade. Key zones are created by...
Chart 87
set of uptrends and downtrends creating a symmetrical triangle. I will treat these setups the same way as when I have multiple patterns forming Ch 8.8 . 0BV M X- 9m wt -01 OKMrtt a 0BV M X- 9m wt -01 OKMrtt a Rallies and sell-offs can also be measured and predicted And much like how we have now learned to draw support and resistance, uptrends, and downtrends, we can also draw retracement levels. Imagine that you are waiting to enter the market if prices trade above the downtrend or prices trade...
EXAMPLE 41 Profiting from Inconsistent Probabilities
You are examining the common stock of two companies in the same industry in which an important antitrust decision will be announced next week. The first company, SmithCo Corporation, will benefit from a governmental decision that there is no antitrust obstacle related to a merger in which it is involved. You believe that SmithCo's share price reflects a 0.85 probability of such a decision. A second company, Selbert Corporation, will equally benefit from a go ahead ruling. Surprisingly, you...
Quasicrystals
Penrose found that there are two simple shapes that you can use to fill a space as large as you like and which have five-fold axes of symmetry. The shapes are built from 6 flat faces which are , that is, shapes with all sides of equal length like a square and which has oppopsite sides paralled again like a square , but which does not have all its angles equal - so they are diamond shaped rhombs, rhombuses . The Penrose tiling shown on the Flat Phi page is also made from two rhombuses and fills...
LCHClearnetClearnet delivery procedures
LCH.Clearnet sets down all its delivery rules and procedural requirements in its publication, 'General Regulations, Default Rules and Procedures'. One of the key stipulations is that LCH.Clearnet procedures must be read in conjunction with the rules of the exchange. The exchange rules and administrative procedures will always take precedence in cases of conflict. LCH.Clearnet defines its delivery procedures, some of which are common to all contracts which LCH.Clearnet clears. These address...
Counterattack Lines
Counterattack lines are formed when opposite colored candlesticks have the same close. The best way to describe this pattern is by discussing the illustrations in Exhibits 6.38 and 6.39. Exhibit 6.38 is an example of a bullish counterattack line. This pattern occurs during a decline. The first candlestick of this pattern is long and black. The next session opens sharply lower. At this point, the bears are feeling confident. The bulls then stage their counterattack as they push prices back up to...
Fraction of the 500 Companies Meeting the Criterion
Company will increase combined sales growth rate Balance sheet impact manageable If the criteria are independent, how many companies will pass the screen 8. You apply both valuation criteria and financial strength criteria in choosing stocks. The probability that a randomly selected stock from your investment universe meets your valuation criteria is 0.25. Given that a stock meets your valuation criteria, the probability that the stock meets your financial strength criteria is 0.40. What is the...
Total Risk Systematic Risk Unsystematic Risk
Diversification reduces the unsystematic risk of a portfolio. Remember that on average, the negative stock-specific surprises affecting companies in a diversified portfolio will be offset by positive surprises. TABLE 2-7 How Many Stocks Make a Diversified Portfolio TABLE 2-7 How Many Stocks Make a Diversified Portfolio Average Standard Deviation of Annual Portfolio Returns Ratio of Portfolio Standard Deviation of a Single Stock Table 2-7 summarizes the results of a study8 performed by Meir...
Guaranteed Minimum Maturity Benefit
In this section, we show how to generate the distribution of the present value of the guarantee liability for a simple GMMB policy held by a life aged x with remaining duration n years. We assume a monthly discrete time model for equity returns and management charges. Withdrawals and deaths are assumed to occur at month ends. As discussed, exits are treated deterministically, so the only random process simulated is the equity price process. Clearly other assumptions and approaches are possible...
The Principles Of Investment Markowitz
Just how an investor should allocate his resources has long been debated. Classical wisdom suggested that investments should be allocated to those assets yielding the highest returns, without the consideration of correlations. Before the modern formulation of efficient markets, speculators widely acted on the belief that positions should be taken only if they had a competitive advantage in terms of information. A large amount of resources were therefore spent on analyzing financial information....
Concept Checkers SecurityMarket Indicator Series
1. Which of the following is NOT a criticism of the Dow Jones Industrial Average A. The index does not track the NYSE. B. There are a limited number of stocks in the index. C. The stocks only represent the biggest NYSE stocks. D. There is a downward bias in the computation of the index. 2. All of the following are factors to be considered when constructing a market index except C. weighting the items in the sample. D. the computational procedure needed to combine the items in the sample. 3....
Bullish and Bearish Rejection Patterns
The Bullish and Bearish Rejection patterns are reversal patterns and occur in conjunction with support and resistance lines. When the currency pair attempts to breach the support or resistance line and fails it has been reeected at that level and reverses. Bearish Reeecti on Bullish Reeection There are many more combinations of Candlestick patterns. We have only selected a few that work well for us and limited the number to keep things smpe. Following this section are a number of charts which...
Multilateral Institutions Fewest Degrees of Freedom
The discussion in Chapter 2 highlighted a key multilateral predicament occasioned by the ongoing structural transformations On the one hand, there is need for better coordination at the multilateral level to facilitate the realignment of national economies and the smooth functioning of the international financial system, including the orderly correction of the payments imbalances. On the other hand, there is a distinct lack of effective multilateral mechanisms that command the necessary...
Multiple Time Compressions
Most charting packages will not allow traders to view eight time compressions at once. If a multiple compression chart package is available to traders, as shown in Figure 10.4, it will give you the necessary overall quick view of Fib comparisons, as well as a FIGURE 10.2 River Oscillator Indicator ROI signal . Courtesy of Concorde Forex Group, Inc. FIGURE 10.2 River Oscillator Indicator ROI signal . Courtesy of Concorde Forex Group, Inc. FIGURE 10.3 River channel RC signal. Courtesy of Concorde...
John Burr Williams
John Burr Williams graduated from Harvard University in 1923 and went on to Harvard Business School, where he got his first taste of economic forecasting and security analysis. After Harvard, he worked as a security analyst at two well-known Wall Street firms. He was there through the heady days of the 1920s and the disastrous crash of 1929 and its aftermath. That experience convinced him that to be a good investor, one also needs to be a good economist.9 So, in 1932 at the age of 30 and...
Development Team
Stage 3 is where the development team' s senior software engineers take control of the project to design and build clean, optimized, robust, and fast software. Of course, software development processes have been researched in depth over the last 40 years, and in this step we will not rewrite the research, but rather link our K V methodology to agile processes and the Software Engineering Institute ' s SEI models for designing and building tight software. We do, however, believe in test-driven...
Margin Requirements
When a position is first taken in a futures contract, the investor must deposit a minimum dollar amount per contract as specified by the exchange. This amount, called initial margin, is required as a deposit for the contract. Individual brokerage firms are free to set margin requirements above the minimum established by the exchange. The initial margin may be in the form of an interest-bearing security such as a Treasury bill. As the price of the futures contract fluctuates each trading day,...
Using PMO MACD Indicators
Of all the momentum indicators out there, I like PMO, developed by Carl Swenlin. This proprietary indicator is based on a rate-of-change calculation, which is exponentially smoothed. PMO behaves similar to the MACD momentum oscillator developed by Gerald Appel. We use the weekly PMO and MACD on the indexes to pick trends that usually last from three to six months. Figure 6.13 shows the topping process in the S amp P 500 in January to March 2004, as discussed previously. Notice here that both...
of AUM 10000
The 1 percent annual AUM fee is not usually delivered in one lump sum. Instead, it is normally calculated as 1 12 of 1 percent every month, and the funds are automatically transferred from the investor's account to the trader's account at the beginning of every month. In order for this automatic transfer to occur, both the investor and the trader must have accounts with the same broker and must file the proper paperwork with that broker. Forex brokers tend to be very helpful when facilitating...
Evaluating A System Statistically
Now that some of the basics are out of the way, let us look at how statistics are used when developing and evaluating a trading system. The examples below employ a system that was optimized on one sample of data the m-sample data and then run tested on another sample of data the out-of-sample data . The out-of-sample evaluation of this system will be discussed before the in-sample one because the statistical analysis was simpler for the former which is equivalent to the evaluation of an...
Norepinephrine
Norepinephrine was historically called noradrenaline. Norepinephrine is released during sudden stress. Norepinephrine itself stimulates the release of the stress hormone cortisol, described below. Norepinephrine causes the rush of tension that people feel when precipitously surprised, and it prepares the body for the fight-or-flight response. During acute stress, people experience psychological symptoms of decreased attention span, hypervigilance, all-or-none black-and-white thinking, and...
Wingspread Dissection In Practice
We are going to follow an initial trade and the subsequent adjustments made in the RD3 Webinar Series, where we forecasted a likely expiration range with the Diamonetric Grid5 Exhibit 6-23 . GOOG Google was trading at 296 with 23 days to go and a target price of 280, while staying within the range of 260 to 300. The initial trade warranted either a 280 calendar spread, or a Butterfly with a Technical analysis tool used to determine profit opportunities based on forecasting probable trading...
Iron Wingspreads
A note about short iron butterflies and iron condors despite the fact that they are short, they act the same as long call or put wingspreads in that they are a play for the same trading range that the strikes cover. Iron butterflies and iron condors are a seeming contradiction you receive a credit to be long the range that you want the underlying to reside in. Is the credit for the short iron butterfly better than a debit for a regular long butterfly A short iron butterfly has the same risk...
Discount Factors
Another important concept is that of a discount factor between two times The discount factors are, of course, fundamental quantities used in present value calculations, it is useful to apply a double indexing system to the discount factors paralleling the system used for forward rates Accordingly, the symbol dj k denotes the discount factor used to discount cash received at time k back to an equivalent amount of cash at time j The normal, time zero, discount factors are d do i, d2 do 2, . ., d...
Massaging the Numbers and Cooking the Books
Beyond choosing between alternative accounting methods, business managers can go two steps further in manipulating recorded profit. The first technique is called massaging the numbers or income smoothing. Business managers can control the timing of some expenses and sales revenue to some extent and therefore boost or dampen recorded profit for the year. In this way managers ''put a thumb on the scale, the scale being net income for the year. When managers cross the line and go too far it's...
Aa2 Ga2 Sda2
In these equations, the value SD A 2 can also be written as V or as 1.25 M 2. This brings us to the point now where we can envision exactly what the relationships are. Notice that the last of these equations is the familiar Pythagorean Theorem The hypotenuse of a right angle triangle squared equals the sum of the squares of its sides But here the hypotenuse is A, and we want to maximize one of the legs, G. In maximizing G, any increase in D the dispersion leg, equal to SD or V A 1 2 or 1.25 M...
Fund of Funds
A fund of funds FOF raises capital from limited partners and invests the proceeds in several hedge funds. Hedge fund of funds can potentially solve a number of the aforementioned problems. They may offer lower minimums, have more regular liquidity, but most important, they perform the due diligence and manager selection for you. If staffed by a competent group, this function can prove to be worth its weight in gold. Risk is also spread across a number of funds, from a low of a couple of funds...
The Squeeze Play
As we noted earlier, most good trading strategies begin with a market tendency traders notice that the market tends to behave in a certain way, and then they create a strategy that seeks to capitalize on this tendency. Let's look at a strategy that is designed to take advantage of volatility in the forex market. Volatility tends to run in cycles. In other words, periods of high volatility tend to be followed by periods of low volatility. There is a simple explanation for this when a market is...