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4

Think of this in terms of Taylor series. Let's say the option price today is $C\left(S,t\right)$ where S is the underlying price and t time. Let's say the underlying price changes by $\Delta S$ in a time interval $\Delta t$, so your P/L will be: $\mathrm{P/L}=C\left(S+\Delta S,t+\Delta t\right)-C\left(S,t\right)$ Use Taylor series to first order in t and ...

3

Small details accumulated over 10 years will explain the discrepancy. You need to simulate the actual strategy i.e. include cost of funding the long index leg, cost of margining the futures leg, replicate the index roll properly (create a composite rolled-future index where the 3rd Friday return is VG1(Friday close) / VG2(Thursday close) - 1 and take the bid-...

3

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 loss (since there is no limit to how high the stock can go). Exactly the same principle pertains in FX. If your quote currency (or home currency) is EUR and ...

2

You should have bought your (long) stocks with the proceeds of the ETF sell.

2

[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, and the second expression is always > -100. ––– dm63 Feb 25, 2017 at 12:52

2

I will try and give some feedback on your questions. Will betas be negative for the short book? Not necessarily, no. The beta of a stock is not related to you having a long or a short position to it. How would I calculate returns for the L/S portfolio Assuming your total portfolio including cash is $V_{0}$, and each line has made $PNL_{i}$, then your ...

2

Yes, it is normal for a L/S fund to have a lot of cash. When you short securities your account is credited with the proceeds from the sales. So if you short 1 million of stock you end up with 1 million cash and -1 million short stock position. Another way to look at it is: as you mentioned, the weights as a fraction of NAV have to add up to 1.0 by definition ...

2

What you're trying to do is express all your positions in terms of a risk currency. Then you can track your PnL in only one currency. You need to express all this in an Excel spread sheet and include some rates, a bit like the screenshot here.

1

While it is of course possible to apply standard definitions of returns, one needs to bear in mind that a long/short portfolio may end up having a net negative value. Thus: i) You cannot use continuously compounded returns. Starting out with a positive portfolio value, continuously compounded returns can never take you to a negative portfolio value whatever ...

1

What seems to be your problem? Which calculations do you do that will not give you a decent answer? Your portfolio value is NAV = 98.87 and the next day it is: NAV=98,57. $$r=\frac{NAV_1-NAV_0}{NAV_0}=\frac{98.87-98.57}{98.57} = -0.0030=-0,30\%$$ Also, be aware that you weights are not $1$ and $0.5816$ anymore but $$w_{ABC}= 97.79/98.57$$ $$w_{XYZ}... 1 The long short portfolio you created is highly leveraged. That means it requires investing much more than the amount of capital you have, the additional capital would have to be borrowed. In your portfolio the sum of the positive weights is 548.667 and the sum of negative weights is -448.665. The sum of these numbers is 100 so you have a 1 to 1 exposure to ... 1 From a mathematical perspective and under the capital market assumptions of finance theory, you would be right. However in real life, there are a number of risks that remain that keep this from being a risk free return. Among these risks are dividend risk, taxes and tax risk of different investors, interest rate risk and central bank policies, inter and ... 1 I would have a look at ETFs tracking the FTSE 100. There will still be a small tracking error due the the way ETFs work. At a starting point have a look at this list: FTSE 100 Index ETFs - ETFdb.com 1 A currency quote (EURUSD 1.1, for example) put into an equation with units is 1 EUR / 1 USD = 1.1 or 1 EUR = 1.1 USD. Units or volume of a currency pair is expressed in terms of the base currency (EUR in the example), which means bids are buying and asks are selling the base currency. I glanced a few examples and it looks like you're right, but here's one ... 1 You calculate them the same way that you would for any other pnl stream. First calculate the excess returns, i.e. the P&L after accounting for financing (for a long-short portfolio, your financing includes the difference between the rates at which you can borrow and lend cash, as well as any fees for shorting particular instruments) divided by your risk ... 1 You can actually show by construction that the beta of the portfolio is the weighted sum of all the underlyings betas. Assume the return of the benchmark and some asset a at time t are respectively denoted r_{b,t} and r_{a,t}, then the beta of a given asset is defined by:$$r_{a,t} = \alpha_a + \beta_a r_{b,t} + \epsilon_{a,t} Let's assume you ...

1

Market-neutral portfolios seek to eliminate market risk, so sum of the weights could be even a zero. That would mean that you bought a lot of some equity, and then borrowed some other equity and sold it. You have cash now, but you also have risks, because you will have to return the borrowed equity in the end, and who knows how much you will have to pay to ...

1

You should first determine whether you want to look at relative or absolute returns. You may want to use position weights relative to the benchmark rather than market value if interested in relative value. For absolute returns consider your three components (long, short and cash - where cash includes borrowing, other costs and in/out flows) P&L and ...

1

Perhaps you might have to "match" Tick data to the best bid/offer to see which price(s) go through... If say the spread is 35.50/36.50 and the tick at that moment is 36.50 then we can consider this to be "buyer initiated" and of course if the tick is 35.50 then it becomes "seller initiated". That is to say if the price is above the average of the current ...

1

Hedginge/Adjusting would be with the Beta of the inverse ETF. Usually, Long/Short strategy would involve an ETF and a stock in which you would Beta adjust the ETF position. You can use an ETF, I don't see anything wrong with this as long as their is some level of correlation between the Short and the Long. You want them to mean revert in a determined time ...

1

The daily mark-to-market reduces the counterparty risk by making sure every day that the counterparties can pay for their losses. For a forward contract, on the other hand, there is no daily mark-to-market and one simply have to trust that the counterparty can pay up (or deliver/take delivery of goods) at settlement. Lets consider the Farmer. Yes, his price ...

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