Quantitative Trading: VIX Factor Model and Trend Following

Posted on April 29, 2017 By Harbourfront Technologies

More and more investors are using the power of computing technologies and quantitative techniques to manage their portfolios these days. They believe that quantitative trading can help reduce the PnL volatility resulted from emotional decision making and thus increase the consistency of returns. However, sometimes the machine beats the man, …

More Examples as Why Hedging is Important

Posted on April 24, 2017 By Harbourfront Technologies

Two weeks ago, in a post entitled To Hedge or Not to Hedge, we argued that it’s always important for corporations to hedge the commodity prices and not to speculate. This post continues with more examples that highlight the importance of economic hedging. As oil price fluctuates, airlines can see …

Divergence Between Credit Default Swap and Equity Volatility

Posted on April 17, 2017 By Harbourfront Technologies

In a previous post, we examined the relationship between the Credit Default Swap (CDS) and equity volatility, and argued that there is a strong correlation between them. But like any relationship in financial markets, this one can break down and divergence can happen. For instance, last month we noticed that …

Another Look at Prepayment Risk of Mortgage-Backed Securities

Posted on April 11, 2017 By Harbourfront Technologies

Yesterday the Federal Reserve Chair Janet Yellen said at a University of Michigan event that the Fed planned to raise short-term interest rates. “I think we have a healthy economy now … but it’s been a long time coming,” Yellen said. Yellen said the current unemployment rate of 4.5% is …

To Hedge or Not to Hedge

Posted on April 8, 2017 By Harbourfront Technologies

Last week, Bloomberg presented a fascinating story about Mexico’s secretive oil hedging program. We noted that while it was designed as a hedge, the Mexican government has made money consistently with it. If anything, recent results have made the Mexican government look especially good. The country earned $6.4 billion in …

How Will IFRS 9 Affect Financial Institutions?

Posted on April 6, 2017 By Harbourfront Technologies

In a previous post we discussed how IFRS 9 will affect commodity firms through hedge accounting programs. Generally speaking, as pointed out by Thack Brown in this post, IFRS 9 will affect financial and non-financial corporates through: 1-New classification and measurement principles for financial assets, 2- New impairment models that …

Relationship Between Credit Default Swaps and Equity Options

Posted on April 3, 2017 By Harbourfront Technologies

After an increase in volatility, equity markets seem to be going back into the state of calmness. Additionally, with Easter coming up, volume and volatility are expected to remain low, at least for a couple of weeks. However, beside the equity world, the credit market is experiencing a tightening as …

Hedging in the Mortgage Backed Securities Market Can Increase Volatilities

Posted on March 28, 2017 By Harbourfront Technologies

Equity markets were relatively calm after the US election. The recent weeks, however, have seen some increase in volatility. Is this just a blip or the start of a volatile period? Nobody knows the exact answer. But Gregory Meyer et al of FT.com reported that there are firms, notably DRW, …

Hedging Should be Based on Risks and Not on Forecasts

Posted on March 23, 2017 By Harbourfront Technologies

A common belief among commodity producers, importers and exporters is that hedging should be based on analysts’ expectations. Hence, they often attend meetings where they expect to hear forecasts from analysts and experts. For example, Ed White recently wrote Meeting halls at farm conferences are packed when the market analysis …

Should We Buy VIX Futures When The Spot VIX is Low?

Posted on March 20, 2017 By Harbourfront Technologies

With the VIX being so low, many investors believe that now is the time to go long volatility. This belief mainly stems from the mean reversion property of the VIX. However, we should note that The speed of mean reversion in the low volatility regime is slower than it is …