6
votes
Accepted
Use of interest rate swaps in liability-driven investing
Based on a Bloomberg article by Matt Levine, this is how it works:
Pension funds have long-term liabilities: say a liability of £100 in 30 years from now. This liability will have a net present value, ...
- 5,998
5
votes
Accepted
Why does rebalancing leveraged portfolios buy winners and sell losers?
Portfolio as it stands:
300% A
-100% B
Total: +200%.
Ratio 1.5:0.5
Short additional 50% B. Now:
...
- 3,669
5
votes
What is stopping me from using high leverage on high Sharpe strategies?
Not sure if "3-4 Sharpe" indicates the value of the Sharpe ratio you're earning since such magnitude is meaningless without some benchmark to compare against, due to it being a purely ...
- 2,980
4
votes
Accepted
Max option leverage strike
Ciao,
I'm studying this problem from a while. Let me post the graph obtained numerically. I've used the following parameters:
$$
\left\{
\begin{array}{rcl}
S &=& 2 \\
r &=& 0.01 \\
\...
- 445
4
votes
How to trade leveraged ETFs
Quite a good article can be found here: http://seekingalpha.com/article/3140956-investing-in-leveraged-etfs-theory-and-practice
Just selling a pair of leveraged ETFs to harvest the "volatility decay" ...
- 27.3k
4
votes
In FX trading, is the risk for long positions higher than for short positions, or vice versa?
I you take a long position in a stock the worst that can happen is the stock goes to zero, and you lose your investment.
If you take a short position in a stock, you have the potential for unlimited ...
- 5,891
4
votes
Should the Sharpe ratio of a portfolio change when it is leveraged?
Let us assume:
a constant risk-free rate $r$
a risky asset with returns $X$
with expected value $\mathbb{E}(X)=\mu_X$
and variance $\text{Var}(X)=\sigma_X^2$
a portfolio investing $w$ in the risky ...
- 11.1k
4
votes
Accepted
How does the Collateral in Collateralized Loan Obligations (CLOs) Work?
The loans are placed in a vehicle company (“special purpose vehicle” or SPV). This company issues various tranches of debt and purchases the loans from the marketplace. There is no specific posting ...
- 16.5k
4
votes
How do you define the NAV of a leveraged ETF?
Are you familiar with how a futures trading account works? You deposit a certain amount of cash. When you "buy" a future this does not use up any cash, nor is the future shown on your ...
- 10.9k
3
votes
Accepted
The relationship between volatility of underlying asset, leverage and the volatility of the derivative
The key variable is indeed the derivative's elasticity $\Omega$ (aka leverage, Lambda). It is defined by $$\Omega=\frac{\frac{\partial V}{V}}{\frac{\partial S}{S}}=\frac{\partial V}{\partial S}\frac{S}...
- 15.2k
3
votes
How does the Collateral in Collateralized Loan Obligations (CLOs) Work?
How it works has been described clearly by dm63. I commend that answer.
I would like to add a few words about "collateral", what does it refer to?
Obviously the buyers of the debt tranches ...
- 10.9k
3
votes
Accepted
Implementing leveraged Risk Parity Portfolio using Direxion 3X ETF
Apologies in advance for being hyper-critical. I have somewhat strong feelings about this =P
The purpose of risk parity is to improve portfolio efficiency via achieving better diversification. (We ...
- 11.4k
3
votes
Accepted
What is the source of the money in a leverage transaction?
You borrow that money from your broker. If you are retail client with for example IG they will offer this service to you. They will charge you some interest for the lending.
There will be a margin ...
- 1,558
3
votes
What does it mean for an option strategy to be leveraged
There is a little known Greek called "lambda" or leverage which equals Delta times Stock price divided by option price $\lambda=\frac{\Delta . S}{c}$. So if $\lambda>1$ the option could be said to ...
- 10.9k
3
votes
Accepted
What kind of option would best be suited for a price based algorithm?
You may be looking for synthetic longs/shorts which would be buying/selling an ATM call and selling/buying an ATM put. This will give you leverage while nearly replicating the underlying.
I would ...
- 750
3
votes
How do leveraged ETFs achieve their investment objectives?
Q1 How leveraged ETFs achieve their leverage:
Depending on the fund house's strategy, leverage is typically achieved by investing in futures, swaps, by borrowing funds, or a combination of above. You ...
- 31
3
votes
Leveraged ETF pair trade, where's the gamma/convexity?
Both products actually have positive convexity, they will buy more underlying (SP500) when the price goes up and sell it when it goes down.
However, if you hedge every day, you will just cancel out ...
- 2,888
3
votes
Leveraged ETF pair trade, where's the gamma/convexity?
I disagree that these products are convex*.
At any point in time, the ETF exposure to the underlying is linear, it's just that it changes through time. A 2x ETF will just have 2x exposure to the ...
- 2,531
3
votes
Leveraged ETF pair trade, where's the gamma/convexity?
As @Lliane explains, you are actually describing a position in which the underlying is rebalanced everyday, hence the compounding effect of the leveraged ETF vanishes.
Maybe a bit of modelling can be ...
- 7,989
3
votes
Accepted
Operating Leverage Interpretation
Operating leverage $k$:
$$k=\frac{Quantity*(Price-AVC)}{Profit}$$
but profit (actually operating profit) is:
$$Profit=Quantity*(Price-AVC)-FixOpCosts$$
If quantity sold increases by $a\%$ then our new ...
- 866
3
votes
How do you define the NAV of a leveraged ETF?
I am not 100% sure, but I think taking a close look at one leverage ETF, it's NAV and holdings may help.
Let's take an example: TQQQ - UltraPro QQQ (which is a 3x leveraged NASDAQ ETF)
If I download ...
- 8,022
3
votes
Accepted
Optimal leverage for strategy with normal returns
Assuming you are compounding returns, the optimal strategy is given by:
μ/σ^2
For your strategy this is 0.05/0.01 = 5x, but because of your constraint of a maximum of 2x, then you'd choose 2x. From a ...
- 749
2
votes
How to trade leveraged ETFs
One standard strategy is to short both "bull" and "bear" ETFs (usually called "double short"). A bit naive heuristics is that if you're loosing money holding a long position due to volatility, you can ...
- 1,541
2
votes
Accepted
How does tranching cause leverage?
The leverage is conceptual (as you're not borrowing something to buy more of something in the standard form of leverage). I think it'll become clear when you compare an equity tranche position to a ...
2
votes
Accepted
What does it mean for an option strategy to be leveraged
In general any investment position is said to be leveraged, if it is financed by a debt position. This is with regards to options, stocks or any other security.
Say you buy an option with maturity in ...
- 86
2
votes
Accepted
Leveraged Permanent Portfolio Using ITM Call Options
I can see the genius is your investment thesis. I looked at the probability analysis in TOS and found that it is highly unlikely that the above options will go OTM on Jan 2019. Which means, this is ...
- 48
2
votes
Are leveraged ETFs cheaper than using leverage?
Leveraged ETF have negative gamma: the higher the volatility of the underlying index the bigger the negative drag.
This is a big pitfall of those instruments because one can be correct with the ...
- 2,187
2
votes
Accepted
Do I need that extra cash to exercise call or put options?
This would depend on whether the option you bought is cash- or physically-settled.
Let $V_t$ be the intrinsic value of your option at time $t$, $T$ its maturity and $y$ the number of shares it gives ...
- 7,989
2
votes
Accepted
In FX trading, is the risk for long positions higher than for short positions, or vice versa?
[Your] analysis is correct. The long trade is worth 100 - 100/FX, and the short trade is worth 100/FX -100, where FX=ending EURUSD exchange rate. The first expression has unlimited downside as FX -> 0,...
- 9,332
2
votes
Why does the Sharpe ratio not change when the strategy is leveraged?
Sharpe ratio = $\frac{r_p - r_f}{\sigma_p}$, where:
$r_p$ is the expected portfolio return
$\sigma_p$ is the portfolio's standard deviation
$r_f$ is the risk free rate.
When you leverage '$n$' ...
- 788
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