August 15, 2007 • 10:29 pm
I’ve been working on my networking technology degree in lieu of concentrating on Binaries for the past 6 months. However, I’m still fascinated with how risk is managed in today’s world: in particular the effect of China’s vast holdings of US debt to about 1 trillion US. The following comment is from Brad Sester from his blog, on this issue:
“gillies — i actually disagree with what we all agree on (that china shoots itself in the pocket book if it starts to sell dollars) … since i argued (note the post above) that china shoots itself in the pocketbook every time it adds a dollar to its portfolio. sure, ending the status quo (and the status quo is dollar buying, not holding on to china’s existing $) means taking losses — but china would face far smaller financial losses by changing policy now than by changing policy later, when it has far more dollars. where china hurts is on the export side.
of course, everybody may be right and i may be wrong, but i have a lot of convinction on this one: to avoid losses now, china has to add to its future losses.
curious guest: China may have hedged v move sin eur/$ — i.e. it coudl have swappped some of on balance sheet $ for euros through an off balance sheet transaction. my guess tho is that china couldn’t do this in a big way without the market getting wind of it, and if it did it in a big way, it would move the eur/$ market (someone else has to take the $ for China to get rid of it). macroman is alas on vacation, but he would have a better sense of this than me.
the main risk that china is taking tho is not the risk that the $ tanks v the eur, but rather that the RMB appreciates against both the EUR and the USD. and china cannot hedge that risk away — no one else wants to hold $ when they can hold RMB, which is why the PBoC is building up its dollars in the first place. basically, that risk is an unhedgeable risk — and it is a risk the pboc has to take so long as it wants to keep the rmb stable v the $ in the face of market pressure for appreciation.
guest with a banker friend who doesn’t like stupid blogs …
well, on this issue at least, i think i am reasonably credible — i used to work at the US treasury, i testify before congressional commitees, and the like. I have my point of view, of course, but i hope I rise above the average level of a “Stupid blog” from time to time. Your banker friend is right in the sense that china’s dollars ultimately have to be spent on us goods (or traded for something else), tho i guess they also coudl be sold to domestic chinese investors who want to buy US assets (if such demand materialized; right now, chinese savers prefer to keep their funds at home). He also is right that the growth in china’s dollar reserves is fueling rapid money and lending growth in china, tho china could achieve the same thing by “monetizing” domestic Chinese bonds without taking on the $ risk it now is taking on. Your banker friend should understand that — basically, a central bank can print cash against either domestic bonds (what the US does) or foreign assets (what china does) and if you print cash against assets denominated in your own currency, you have less currency risk. I think your banker friend misses one key point though: to keep the game going, china has to not just hold on to its existing dollars, but to buy every more dollars to provide the US with the ongoing financing needed to cover the uninted states cash flow deficit. the scale of financing that china is providing to the us is rising strongly over time as well — so the real question is whether china will continue to do so indefinately, and then what happens when china becomes a bit less willing to make up for a shortfall in market financing for the us deficit. part of the answer is that china itself will take losses. but part of the answer is that the us economy also would need to adjust — i personally think we would be better off if that adjustment started sooner not later.
in any case, the views of your banker friend are fairly common. my view is more of a minority view. but it isn’t that far — i suspect — from the views of Dr. Summers, so it isn’t an entirely crazy minority view. you might want to print out Summers’ per jackobsen lecture (i am sure i misspelled the lecture name)and give it to your banker friend — it discusses these very issues (it is the second link in the blog).”
Filed under: Research , China Sester
I compared a 4pm near-at-the-money 3325 long bine against Oanda’s box option product at 1127 EST when EUR was at 3327. The premium to sell (to hit a price below 3325 on OA’s box) was $45 for a (4pm-4:05pm) compared to the $50 at the same price and time for the HS binary on Hedgestreet.com, representing a 10% difference. You would pick up more premium going with HS for the selling of the bine than buying the box. And these are already factoring in the wide spreads on HS. (Update 2/11/2009: Reading my own post here 2 years later, I assume I was referencing some kind of arbitrage opportunity here)
Filed under: Uncategorized , arbitrage, hedgestreet
The implied cash market leverage for an At-The-Money bine (at $50) is 1329% compared to the highest fx cash market leverage of 200%. If you were long an ATM bine at $50, the equivalant 200% cash positon would be $333. In other words, if you feel an ATM 1.3325 2pm bine was going to hold, you would receive an approx 50% discount on Hedgestreet.com for your trade. This is a leverage-calculated price.
Even if you felt the price wasn’t realstic, your stop-cover would have offered some protection. As you see to the left, the post-New Housing figure announcemen’t affect on the Euro on the 12-2pm NY EST session (per-tic time frame). The maximum leverage on Oanda.com is 50% which gives a equiv. cash position of $1330 on 50,000 units. Each 1 pip = $5, 10 pips = $50. Say you sold a 3225 2pm. You see the price went to 3339 approx. Your loss is binary-static; your follow-up action would be to spread long 5 pips.
Theoretically, a potential 5-pip loss over 2 hours would yield a “10-pip” gain on the 3325 2pm bine. As you see in the graph, your cover-loss spread would have been egagined at 1.3330. The breakeven would have been 1.3338. Is this noise? Take your 5 pip profit in cash and wait till prices go back to <$50 on the 3325 bine. Your profit would be your Cash Pips – the noise factor. Or would you want to implement the tight stop? as each tic up represents your net profit.. But, alas, as the case may be, you’ve paid for the privledge to play this small range up , waiting for it to come down to the bine, then up again in cash.
Filed under: Forex , hedgestreet
This was a 3278/3250 -12 noon. (Long EUR/USD at 3278 short 3250 @ 93) I took on at 9am. In play today was today’s Feb. Housing figures and Event Risk – the capture of British sailors by Iran and rising oil, all adding fuel to the fire, no pun intended. Naturally all this would lead to a >7 pip VIX risk, even for my most modest clients. Even a non-event risk like the Federal Reserve last week announcing they there would be no change in rates caused a >7 pip VIX shot.
Loss/Cover Play: My initial stop loss on this trade was -25 pips (3253), and my bine close I set at 63 (+30 pips). This is one of those classic stop-loss covers. If EUR/USD stopped out, it would of breached the bine close for the cover-stop-loss. However, the VIX event horizon more than likely would have covered a $7 loss on the 12 noon 3250. Eventually my cash got closed out at 3340 on this trade by a tiny trailing stop I kept moving up, for a net pip gain of +50 in 1 hour.
A simple buy-into-VIX straddle on both of these at 9:30am could have also been employed, but the same leverage was closely met by the cash + 1-sided bine strategy employed. I attached today’s graph just to show the bine’s (green lines) and the price going through these levels. As you can observe, the straddle would have been successful given the propensity for the price to climb through the 3300.
The one advantage the VIX straddle has over cash is the delta. VIX was priced, but the VIX surge was not. Thus the change in OTM bines per pip from, say 3280 – 3310 would have been around 50% greater than most cash – leveraged accounts of the same amount. For example, from 10-15 to 60 $ per contract as it went ITM, even with 2 hours until expiry.
Today’s VIX was pretty much skewed. Apparently the Street was caught off-guard with the February’s Single Home Sales. Even CNBC noted the impact February’s weather may have played on this figure.
Filed under: stop-loss , hedgestreet
March 19, 2007 • 10:50 pm
This video is an old promotional piece introducing binary options. At the time it was made, HS currency binaries were traded three times a day, and the exchange was open until 8pm EST. Currenly its hours are until 4pm EST. I think the interviewer is pretty funny!
Filed under: fun , hedgestreet
David Katz of New York Stringer Magazine makes the following observation regarding the regulated trading of binaries at Hedgestreet.com.
The option premium…represents the investor’s view of the odds that the event will occur. HedgeStreet is careful to avoid the use of the terms “bet”, “odds”and “winnings”; as a regulated exchange, they are eager to avoid being mistaken for a gambling enterprise. Their mission is, in fact, to bring the advantage of hedging instruments, previously only available in large denominations, to the retail market
The implications of offering these type of derivatives teeters on that edge of gambling when such short-term (2 hour) options are “trading” at-the-money. “Trading” is in quotes because, at this time, the volume in binaries is thin or non-existent. Binaries are virtually indistinguishable from a wager when, say, a 1.3325 10am strike binary is at $50 at 9.55 am when the EUR/USD is at 1.3325. At worst, if the underlying was for a small-traded stock with light volume, this would be manipulation; at best, even in FX, its a gamble.
So how does Hedgestreet’s regulated binaries overcome this perception? Its only a matter of time. In the late 1970’s when the first equity indicies were traded, and also in the 1980’s when the International Swaps and Derivatives Association came out with their contracts, the same gambling-mentality existed. As most people in the ISDA and managed-money know, derivatives are merely risk-management tools fitted to achieve certain objectives in one’s portfolio. Those institutions, too, endured the same challenges that Hedgestreet.com is experiencing.
Anyone in the financial world will depict — in hindsight — the higher rate of return equities provided over bonds and money markets going back 50 years. However, go back 50 years ago, were those money managers making the same observations? Those who cite history merely underscore the need for equities – the beginning, crude form of derivatives — in ones portfolio. And as the 1980’s and 1990’s showed, mutual funds, hedge funds, equity options and ETFs were developed along the way. Hedgestreet.com seems no more different than the outgrowth of these products and services. The chasm they have yet to bridge is the retail suitability. As Katz points out, this indeed presents itself as a “mission.” And in that respect, naysayers will eventually dismiss the exchange as “gambling”, especially in its present form.
Filed under: Forex , hedgestreet
3:40 AM 3/19/2007
S1’s highest support level , 3286, was surpassd at 5am, so the s1bine was calcuated at 3300. As expected, this 3300 level held in the 2 and 4pm session. The time premiums would have been high to compensate for such a low VIX. Also, because all the news happened after 8:30 AM, one could of assumed the real R1 was achieved at 10am, since it was in R1 territory, thus selling the 12 noon 3325 bines. Another strategy would have entailed buying at anytime since the EUR was coming off S1 from Europe to NY sessions and selling OTM VIX, since it was going that direction, and it was going to dry up.
Filed under: resistance, support
