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FINANCIAL MARKET COURSES

Relative Value Trading – Strategies & Risks

RV trading involves being neutral to moves up/down in the overall market, while taking advantage of price differentials between individual assets. It is an attempt to benefit from the relative prices of assets that are seen as being out of line.

 

This course examines RV trading strategies within a market (but excludes asset allocation strategies between markets), where offsetting (usually long/short) positions are taken in different assets. Trades are not dependent on the general direction of underlying markets. The course also focuses on trades that exploit some economic relationship between the different assets. This may be evidenced by historic correlation, but may also be the result of a trader's investigation. Finally in this course, we outline some of the risks and pitfalls for RV traders. A case-study of the LTCM hedge fund is included as a reminder of how these dangers are realized in practice.

  • OBJECTIVES

    On completion of this course, you will be able to:

    Describe some of the relative value trading strategies used in various asset markets

    Outline the potential difficulties and risks of a relative value trading strategy

  • COURSE OUTLINE

    Topic 1: Relative Value Strategies

    Equities

    o Equities – Pairs Trading

    o Equities – Achieving Market-Neutrality

    Fixed Income

    o Fixed Income- Butterflies

    o Butterflies – Achieving Neutrality

    o Butterflies – Convexity

    o Butterflies – Other Issues

    o Types of Butterfly

    o Butterflies – Trading Considerations

    Topic 2: Difficulties & Risks in Relative Value Trading

    Potential Pitfalls

    o Transaction Costs

    o ‘Carry’ Over the Life of the Trade

    o Institutional Constraints

    o Market-to-Market versus Mark-to-Model

    Risk Control

    o Problems in Risk Control

    Dangers pf RV Trading

    The Challenge of Change

  • PREREQUISITE KNOWLEDGE

  • ESTIMATED COMPLETED TIME

    75 Minutes

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