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Correlation Trading
In finance, correlation trading is a strategy in which the investor gets exposure to the average correlation of an index. The key to correlation trading is being able to predict when future realized correlation amongst the stocks of a particular index will be greater or less than the "implied" correlation level derived from derivatives on the index and its single stocks. One observation related to correlation trading is the principle of diversification, which implies that the volatility of a portfolio of securities is less than (or equal to) the average volatility of all the securities in that portfolio (This has nothing to do with Modern Portfolio Theory and follows from Statistics 101, definition of portfolio variance). The lower the correlation amongst the individual securities, the lower the overall volatility of the entire portfolio. This is due to the way in which variances behave when summing correlated random variables. To sell correlation, investors can: * Sell a call ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Finance
Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of financial economics bridges the two). Finance activities take place in financial systems at various scopes, thus the field can be roughly divided into personal, corporate, and public finance. In a financial system, assets are bought, sold, or traded as financial instruments, such as currencies, loans, bonds, shares, stocks, options, futures, etc. Assets can also be banked, invested, and insured to maximize value and minimize loss. In practice, risks are always present in any financial action and entities. A broad range of subfields within finance exist due to its wide scope. Asset, money, risk and investment management aim to maximize value and minimize volatility. Financial analysis is viability, stability, and profitabili ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Correlation
In statistics, correlation or dependence is any statistical relationship, whether causal or not, between two random variables or bivariate data. Although in the broadest sense, "correlation" may indicate any type of association, in statistics it usually refers to the degree to which a pair of variables are '' linearly'' related. Familiar examples of dependent phenomena include the correlation between the height of parents and their offspring, and the correlation between the price of a good and the quantity the consumers are willing to purchase, as it is depicted in the so-called demand curve. Correlations are useful because they can indicate a predictive relationship that can be exploited in practice. For example, an electrical utility may produce less power on a mild day based on the correlation between electricity demand and weather. In this example, there is a causal relationship, because extreme weather causes people to use more electricity for heating or cooling. H ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Diversification (finance)
In finance, diversification is the process of allocating capital in a way that reduces the exposure to any one particular asset or risk. A common path towards diversification is to reduce risk or volatility by investing in a variety of assets. If asset prices do not change in perfect synchrony, a diversified portfolio will have less variance than the weighted average variance of its constituent assets, and often less volatility than the least volatile of its constituents. Diversification is one of two general techniques for reducing investment risk. The other is hedging. Examples The simplest example of diversification is provided by the proverb "Don't put all your eggs in one basket". Dropping the basket will break all the eggs. Placing each egg in a different basket is more diversified. There is more risk of losing one egg, but less risk of losing all of them. On the other hand, having a lot of baskets may increase costs. In finance, an example of an undiversified por ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Modern Portfolio Theory
Modern portfolio theory (MPT), or mean-variance analysis, is a mathematical framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk. It is a formalization and extension of diversification in investing, the idea that owning different kinds of financial assets is less risky than owning only one type. Its key insight is that an asset's risk and return should not be assessed by itself, but by how it contributes to a portfolio's overall risk and return. It uses the variance of asset prices as a proxy for risk. Economist Harry Markowitz introduced MPT in a 1952 essay, for which he was later awarded a Nobel Memorial Prize in Economic Sciences; see Markowitz model. Mathematical model Risk and expected return MPT assumes that investors are risk averse, meaning that given two portfolios that offer the same expected return, investors will prefer the less risky one. Thus, an investor will take on increased risk only if compen ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Volatility (finance)
In finance, volatility (usually denoted by ''σ'') is the degree of variation of a trading price series over time, usually measured by the standard deviation of logarithmic returns. Historic volatility measures a time series of past market prices. Implied volatility looks forward in time, being derived from the market price of a market-traded derivative (in particular, an option). Volatility terminology Volatility as described here refers to the actual volatility, more specifically: * actual current volatility of a financial instrument for a specified period (for example 30 days or 90 days), based on historical prices over the specified period with the last observation the most recent price. * actual historical volatility which refers to the volatility of a financial instrument over a specified period but with the last observation on a date in the past **near synonymous is realized volatility, the square root of the realized variance, in turn calculated using the sum of s ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Sum Of Normally Distributed Random Variables
In probability theory, calculation of the sum of normally distributed random variables is an instance of the arithmetic of random variables, which can be quite complex based on the probability distributions of the random variables involved and their relationships. This is not to be confused with the sum of normal distributions which forms a mixture distribution. Independent random variables Let ''X'' and ''Y'' be independent random variables that are normally distributed (and therefore also jointly so), then their sum is also normally distributed. i.e., if :X \sim N(\mu_X, \sigma_X^2) :Y \sim N(\mu_Y, \sigma_Y^2) :Z=X+Y, then :Z \sim N(\mu_X + \mu_Y, \sigma_X^2 + \sigma_Y^2). This means that the sum of two independent normally distributed random variables is normal, with its mean being the sum of the two means, and its variance being the sum of the two variances (i.e., the square of the standard deviation is the sum of the squares of the standard deviations). In order for this ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Call Option
In finance, a call option, often simply labeled a "call", is a contract between the buyer and the seller of the call option to exchange a security at a set price. The buyer of the call option has the right, but not the obligation, to buy an agreed quantity of a particular commodity or financial instrument (the underlying) from the seller of the option at a certain time (the expiration date) for a certain price (the strike price). This effectively gives the owner a ''long'' position in the given asset. The seller (or "writer") is obliged to sell the commodity or financial instrument to the buyer if the buyer so decides. This effectively gives the seller a ''short'' position in the given asset. The buyer pays a fee (called a premium) for this right. The term "call" comes from the fact that the owner has the right to "call the stock away" from the seller. Price of options Option values vary with the value of the underlying instrument over time. The price of the call contract ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Variance Swap
A variance swap is an over-the-counter financial derivative that allows one to speculate on or hedge risks associated with the magnitude of movement, i.e. volatility, of some underlying product, like an exchange rate, interest rate, or stock index. One leg of the swap will pay an amount based upon the realized variance of the price changes of the underlying product. Conventionally, these price changes will be daily log returns, based upon the most commonly used closing price. The other leg of the swap will pay a fixed amount, which is the strike, quoted at the deal's inception. Thus the net payoff to the counterparties will be the difference between these two and will be settled in cash at the expiration of the deal, though some cash payments will likely be made along the way by one or the other counterparty to maintain agreed upon margin. Structure and features The features of a variance swap include: * the variance strike * the realized variance * the vega notional: Like ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Spread Trade
In finance, a spread trade (also known as relative value trade) is the simultaneous purchase of one security and sale of a related security, called legs, as a unit. Spread trades are usually executed with options or futures contracts as the legs, but other securities are sometimes used. They are executed to yield an overall net position whose value, called the spread, depends on the difference between the prices of the legs. Common spreads are priced and traded as a unit on futures exchanges rather than as individual legs, thus ensuring simultaneous execution and eliminating the execution risk of one leg executing but the other failing. Spread trades are executed to attempt to profit from the widening or narrowing of the spread, rather than from movement in the prices of the legs directly. Spreads are either "bought" or "sold" depending on whether the trade will profit from the widening or narrowing of the spread. Margin The volatility of the spread is typically much lower than ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Correlation Swap
A correlation swap is an over-the-counter financial derivative that allows one to speculate on or hedge risks associated with the observed average correlation, of a collection of underlying products, where each product has periodically observable prices, as with a commodity, exchange rate, interest rate, or stock index. Payoff Definition The fixed leg of a correlation swap pays the notional N_ times the agreed strike \rho_, while the floating leg pays the realized correlation \rho_. The contract value at expiration from the pay-fixed perspective is therefore :N_ (\rho_-\rho_) Given a set of nonnegative weights w_i on n securities, the realized correlation is defined as the weighted average of all pairwise correlation coefficients \rho_: :\rho_ := \frac Typically \rho_ would be calculated as the Pearson correlation coefficient between the daily log-returns of assets ''i'' and ''j'', possibly under zero-mean assumption. Most correlation swaps trade using equal weights, in which ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Exchange-traded Fund
An exchange-traded fund (ETF) is a type of investment fund and exchange-traded product, i.e. they are traded on stock exchanges. ETFs are similar in many ways to mutual funds, except that ETFs are bought and sold from other owners throughout the day on stock exchanges whereas mutual funds are bought and sold from the issuer based on their price at day's end. An ETF holds assets such as stocks, bonds, currencies, futures contracts, and/or commodities such as gold bars, and generally operates with an arbitrage mechanism designed to keep it trading close to its net asset value, although deviations can occasionally occur. Most ETFs are index funds: that is, they hold the same securities in the same proportions as a certain stock market index or bond market index. The most popular ETFs in the U.S. replicate the S&P 500, the total market index, the NASDAQ-100 index, the price of gold, the "growth" stocks in the Russell 1000 Index, or the index of the largest technology compan ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Pairs Trade
A pairs trade or pair trading is a market neutral trading strategy enabling traders to profit from virtually any market conditions: uptrend, downtrend, or sideways movement. This strategy is categorized as a statistical arbitrage and convergence trading strategy. Pair trading was pioneered by Gerry Bamberger and later led by Nunzio Tartaglia's quantitative group at Morgan Stanley in the 1980s. The strategy monitors performance of two historically correlated securities. When the correlation between the two securities temporarily weakens, i.e. one stock moves up while the other moves down, the pairs trade would be to short the outperforming stock and to long the underperforming one, betting that the "spread" between the two would eventually converge. The divergence within a pair can be caused by temporary supply/demand changes, large buy/sell orders for one security, reaction for important news about one of the companies, and so on. Pairs trading strategy demands good position si ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
