It has only taken one business day in 2012 to demonstrate what traders see as the greatest challenge for commodity markets in the coming year: “tail risk”. Tail risk is a form of portfolio risk that arises when the possibility that an investment will move more than three standard deviations from the mean is greater than what is shown by a normal distribution. \When a portfolio of investments is put together, it is assumed that the distribution of returns will follow a normal pattern. Under this assumption, the probability that returns will move between the mean and three standard deviations, either positive or negative, is 99.97%. This means that the probability of returns moving more than three standard deviations beyond the mean is 0.03%, or virtually nil. However, the concept of tail risk suggests that the distribution is not normal, but skewed, and has fatter tails. The fatter tails increase the probability that an investment will move beyond three standard deviations. Distributions that are characterized by fat tails are often seen when looking at hedge fund returns.
Wednesday, January 4, 2012
Commodities back on the list of hedge fund favorites
In the end of September, hedge funds had reduced their bets on higher commodity prices only days before raw materials rallied the most in 10 weeks -- they've since double-backed. Bloomberg reports hedge funds, in the week ended Dec. 27, have raised wagers on rising commodity prices the most in 16 months.
What is volatility arbitrage?
In finance, volatility arbitrage (or vol arb) is a type of statistical arbitrage that is implemented by trading a delta neutral portfolio of an option and its underlier. The objective is to take advantage of differences between the implied volatility of the option, and a forecast of future realized volatility of the option's underlier. In volatility arbitrage, volatility rather than price is used as the unit of relative measure, i.e. traders attempt to buy volatility when it is low and sell volatility when it is high.
Funding Pressures To Recede
--Eurodollar futures project key interbank rate at 0.63% in March
--Same contract priced in 0.645% rate at Tuesday's settlement
--Fed-funds futures price in 44% chance for FOMC to raise rate in January 2014
By Howard Packowitz
Of DOW JONES NEWSWIRES
CHICAGO (Dow Jones)--Traders of Eurodollar interest-rate futures felt comforted on Wednesday that funding pressures won't get much worse in the coming months even as Europe continues its battle to reduce government debt to more-sustainable levels.
In addition, despite a recent batch of data showing improvement in the U.S. economy, federal-funds futures project the Federal Reserve will likely wait more than two years before raising its short-term fed-funds rate.
Eurodollar futures reflect expectations for changes in a key interbank lending rate that is considered essential for investors judging the health of Europe's banking system.
Banks hold many of the bonds from governments at risk of defaulting on their payment obligations.
As a result, financial institutions attempting to avoid exposure to that debt have raised the three-month London interbank offered rate, or Libor, that represents the cost of borrowing U.S. dollars.
However, the three-month dollar Libor was unchanged Wednesday, standing at 0.58250%, according to the British Bankers Association.
Short-dated Eurodollar futures on Wednesday projected the Libor will move higher, but at a more modest pace.
Nearby March Eurodollars priced in a rate of 0.63% when the contract expires March 19. That is down from 0.645% at Tuesday's settlement and sharply lower than the 0.76% rate factored in at the settlement on November 29. That was the day before six of the world's leading central banks, including the U.S. Fed and the European Central Bank, disclosed emergency measures to reduce the cost for European banks to make loans for U.S. dollars.
June Eurodollar futures, at Wednesday's settlement, priced in the Libor at 0.705% when that contract expires June 18. That is down from 0.72% at Tuesday's settlement and 0.805% on November 29, prior to the central banks' efforts to keep dollars flowing in the banking system.
Meantime, federal-funds futures listed at CME Group Inc. (CME) continued to show a muted response to increased transparency from the U.S. Fed, set to begin later this month, about its timetable for raising its short-term fed-funds rate.
On Tuesday, the Federal Open Market Committee disclosed that it will offer a rate forecast, based on its projections for economic growth, unemployment, and inflation.
At its past four rate-setting meetings, the FOMC stated that it intends to keep the fed-funds rate "exceptionally" low until at least the middle of 2013.
Many economists said they believe the Fed will use its new communications strategy to signal that the zero-rate policy will last longer than that.
However, such speculation has produced almost no trading volume in far-from-now fed-funds futures contracts.
On Wednesday, the futures market priced in a 44% chance of the FOMC lifting the fed-funds rate to 0.5% at its meeting in late January of 2014 versus a 40% chance at Tuesday's settlement.
The market was fully priced Wednesday for the first rate increase to occur at the late June 2014 FOMC meeting.
The committee has held its fed-funds rate target inside a record low range of 0% to 0.25% since December 2008.
-By Howard Packowitz, Dow Jones Newswires; 312-750-4132; howard.packowitz@dowjones.com
CME Retains The Crown
--CME Group remains world's largest futures market by contract volume
--Economic turmoil also boosted futures trading at Deutsche Boerse, NYSE Euronext
--Strong year overshadows slower-than-usual December activity
(Updates throughout with year-end total volume figures for CME, Deutsche Boerse, NYSE Euronext.)
By Jacob Bunge and Mia Lamar
Of DOW JONES NEWSWIRES
CME Group Inc. (CME) maintained its standing as the world's largest futures market in 2011, outpacing the prospect of an enlarged competitor in the planned merger of Deutsche Boerse AG (DB1.XE, DBOEF) and NYSE Euronext (NYX).
Chicago-based CME reported Wednesday a 10% rise in trading activity over 2010 levels, outstripping growth at the European futures markets run by its smaller rivals as global economic turmoil drove derivatives-trading activity to record levels.
About 3.4 billion futures and related derivatives contracts changed hands on CME's markets over the course of 2011, compared with two billion contracts traded on Deutsche Boerse's Eurex platform and 1.1 billion for NYSE Euronext's London-based Liffe market, according to an estimate from Macquarie Securities.
The three rivals--which could soon narrow to two, pending a European Union vote on the Deutsche Boerse-NYSE merger plan--are vying for control of a sector that has grown faster than the stock market and commands bigger trading fees.
Listed markets also have become increasingly global, with the Asia Pacific region in 2010 accounting for about 40% of global futures and stock-options trade. For decades, CME has sought to nurture ties to expanding financial hubs like those in Singapore and China, while a key aim of the Deutsche Boerse-NYSE merger is to create a more-influential company that can build deeper partnerships in Asia.
The region remains home to the single busiest derivatives exchange in the world, the Korea Exchange. Heavy retail-investor trading in small-sized options tracking the KOSPI stock index has helped lift daily trading activity at KRX to a reported 15.8 million contracts per day, topping CME's average daily turnover of 13.4 million contracts.
KOSPI contracts also constituted the fastest-growing market on Deutsche Boerse's Eurex platform, following a 2010 deal allowing the Frankfurt-based operator to trade the instruments in hours that the Korean marketplace is closed. About 17.4 million such contracts traded on Eurex last year, Deutsche Boerse reported Tuesday.
Deutsche Boerse also owns the International Securities Exchange, a stock-options market that traded 778.1 million contracts last year.
A strong 2011 that brought trading records in CME's energy, agriculture, foreign-exchange and metals markets helped overshadow a slower-than-usual December for the parent of the Chicago Board of Trade and New York Mercantile Exchange. Daily volume for CME averaged 9.6 million contracts in December, down 9% from a year earlier and a 27% drop from November.
Daily volume for interest-rate futures, the CME's biggest product by that metric, fell 30% from a year earlier to average 3.5 million contracts a day. Foreign-exchange volume slipped 11% from a year earlier.
Equity-index volume was up sharply, however, posting a 31% gain from December 2010 to average 2.8 million contracts a day.
Meanwhile, energy-focused market operator IntercontinentalExchange Inc. (ICE) reported its average daily volume was 1.1 million contracts last month, down 1.3% on the year and off 30% from November. Its biggest product, Brent crude futures and options, posted a 7.7% increase in daily volume from a year earlier, a slimmer gain than the double-digit jumps recorded in recent months.
ICE also posted a record year in 2011 with just over 381 million contracts traded, a 16% rise over 2010 activity, the company reported Wednesday.
-By Jacob Bunge, Dow Jones Newswires; 312 750 4117; jacob.bunge@dowjones.com; and Mia Lamar, Dow Jones Newswires; 212-416-3207; mia.lamar@dowjones.com
Eurex enjoys stronger volume
Trading on Deutsche Boerse's derivatives and repo platforms rose strongly during 2011, according to annual figures published by the German exchange operator ahead of an EU competition commission ruling on its planned merger with NYSE Euronext NYX 0.00% .
New Metals and Index Futures Contract For NYSE Euronext
The fledgling U.S. futures market run by NYSE Euronext NYX 0.00% announced Wednesday it would launch a new sort of interest-rate futures contract in the coming months as the Big Board parent ramps up competition with CME Group Inc. CME +0.07% , the dominant player in domestic futures trade.
Capital markets are designed for the benefit of the few
Hypothecation is the practice where a borrower pledges collateral to secure a debt. The borrower retains ownership of the collateral, but it is "hypothetically" controlled by the creditor in that he has the right to seize possession if the borrower defaults. A common example occurs when a consumer enters into a mortgage agreement, in which the consumer's house becomes collateral until the mortgage loan is paid off.
Ever read the Fed.'s meeting minutes? This stuff could stand up to X-rays
Following are the minutes of the Federal Reserve’s Open Market Committee meeting that concluded on December 13.
Euro under pressure
NEW YORK—The euro weakened broadly after a successful German debt auction was unable to dispel investor gloom about Europe's debt troubles. A day after Spain—the 17-nation currency area's fourth-largest economy and one of its most embattled—announced that its budget deficit would likely be wider than initial estimates, markets were jolted by news that the regional government of Valencia was late in repaying a €123 million ($160.5 million) debt to Deutsche Bank. It heightened speculation the country could be forced to seek an international bailout.
Euro Drops To 11 Year Low
Jan. 4 (Bloomberg) -- The euro fell from almost a one-week high versus the dollar as European inflation slowed and Italy’s biggest bank said it needs to raise more capital, fueling bets Europe’s debt crisis is worsening.
Freepoint Commodities Is Hiring
GREENWICH, Conn., Jan. 4, 2012 -- /PRNewswire/ -- Freepoint Commodities LLC, a physical commodity trading and marketing company with more than $300 million in committed equity capital, today announced it has hired Michael Gamson, an international energy trader with more than 30 years of experience, as a Senior Managing Director in charge of developing a domestic refined petroleum products business.
Treasury Market Update, Fed White Paper
Back Below 2.00%: Treasuries rallied off their worst levels of the session, but were still saddled with losses after the Fed released a white paper indicating it will consider policies to reduce foreclosure inventory and eliminate barriers to mortgage credit.
Forecasts Show Colder Weather, natural gas jumps
NEW YORK -(Dow Jones)- Natural gas futures jumped more than 3% Wednesday, spurred by a blast of cold weather in the U.S. northeast and forecasts for colder temperatures later this month that will likely raise gas-fired heating demand.
CFTC data shows grain exposure doubles
As of last Tuesday hedge funds and large investors increased their overall exposure to the 24 US traded commodities that we track by 12 percent to 738,000 lots. In nominal terms this was a 5 billion dollar increase on the previous week.
An inspired corn rally
As the Southern Hemisphere growing season advances, the grain markets have been rallying since mid-December under the cover story of extremely dry weather in South America. March corn has been up as much as 70¢ per bushel since it bottomed on December 15.
Gold rally comes to a grinding halt
Gold’s best rally in ten weeks came to a halt and prices reversed course early this morning as the reality checkthat most markets were being subjected to by global investors took its toll. The yellow metal slipped back to under the $1,600 pivot point after having run into resistance near the $1,605 level and after thus far having been unable to recapture the important $1,620+ value zone. Spot dealings in New York this morning opened with golddown by $10 per ounce at the $1,593.50 level while spot silver fell 2.4% or 70 cents to a quote on the bid-side at one penny above the $29 mark.
Why is inflation calculated without food and energy as if we don't have to eat or drive.
U.S. inflation for food at home may have peaked after crop prices fell for the first time in three years, the U.S. Department of Agriculture’s top economist said.
Greece May Default Without Troika Agreement
Greek Prime Minister Lucas Papademos told business and union leaders today the economy could collapse as soon as March if the country doesn’t accept income cuts as a key means to secure agreement with international creditors on more financing.
EU Closer Iran Oil Ban - Bloomberg
European Union governments moved closer to halting oil purchases from Iran, stepping up the confrontation over the Islamic republic’s nuclear program.
OJ Futures Up On Florida Cold Snap
NEW YORK—Futures of orange-juice concentrate surged to a two-month high Wednesday after the first major freeze hit Florida's main citrus-growing region overnight.
Dollar and Euro, a couple of chumps
NEW YORK (CNNMoney) -- In this corner, weighing in at 45 kilograms soaking wet ... he's all the rage in Paris, Milan, Brussels and Munich! The euro!
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