Books of the Month. Our Catalogue. Recommended texts for Teachers. Teach your child to read. Top Pick. Gift Cards Check Card Balance. Locations where this product is available This item is not currently in stock in Dymocks stores - contact your local store to order. Please note: not all stock is available in all stores. HardCover January 25, Macro Trading and Investment Strategies is the first thorough examination of one of the most proficient and enigmatic trading strategies in use today - global macro.

More importantly, it introduces an innovative strategy to this popular hedge fund investment style - global macroeconomic arbitrage. Burstein proposes a new global macro strategy that is nondirectional and more objective. Use current location. Change store. Available in store Unavailable in store. Show more stores. Check your local Dymocks store for stock. Enter your postcode: Please enter a valid postcode.

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1. Macro Trading and Investment Strategies: Macroeconomic Arbitrage in Global Markets (Wiley Trading)!
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NO YES. This decision is twofold: both the financing characteristics leverage must be meshed with the liquidity concerns. For large hedge funds, the liquidity of the instrument is often a constraint. Since they are frequently taking outright bets on the directions of various markets and are expecting to generate higher than normal returns from doing so, they need to lever themselves. This makes the established positions larger and can disturb markets when they are either initiating or terminating a trade. Thus, large macro funds use spot or cash, forwards, futures, and swaps.

Occasionally, they use plain-vanilla options and seldom use complex derivatives. Usually a macro hedge fund is sophisticated enough to piece together its own complex derivative if that kind of payout is desired. Forward and futures markets have leverage characteristics that are typically more appealing than spot transactions, whereby only a small proportion of the face value of the trade needs to be put up in advance.

In general, the leverage characteristics margin requirements of the instruments are determined in conjunction with the riskiness of the instrument and the riskiness of the hedge fund, as perceived by its counterparties. Thus, although leverage is higher for certain basic instruments—forwards greater than spot, for instance—the amount of leverage that can be obtained is generally lower for positions that entail higher risk.

In some cases, the expected movement in the price of an instrument that would be necessary for a macro hedge fund to profit is not large enough relative to the costs of initiating the position to make it worthwhile. For instance, several hedge funds anticipated a fall in the Korean won but found that the costs of taking a position of a size that warranted the expected gains were too large to make the trade feasible. The examples below attempt to show how hedge funds use various instruments.

Some of the examples could be correctly classified as arbitrage-related trades since some of the risk is transferred.

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However, since it is mostly macro hedge funds executing these trades they are included here. To the extent that hedge funds execute strategies in cash or spot markets, the outright purchase or sale of securities is relatively simple and is not discussed as a separate category, even though establishing short positions in some cash markets can be difficult.

Short currency strategy. A very typical strategy used by macro hedge fund is to sell a currency forward when the hedge fund expects it to depreciate. Since the forward market is an over-the-counter, interbank market, the hedge fund normally executes its sale through a bank or foreign exchange dealer. However, hedge funds could, in principle, find corporate counterparties or even central bank counter-parties , thereby bypassing the bank intermediary. Typically, the hedge fund must post a certain amount of collateral with the bank, 5 percent is an often-quoted number, to initiate the position.

While forward contracts usually do not require payment until maturity, most banks dealing with hedge funds and other financial counterparties require two-way collateral agreements in which a daily mark-to-market assessment of the position is done and any losses owed by the hedge fund are paid by a set time to the bank intermediary. The two-way collateral agreement also means that when the bank is on the losing side of the transaction it makes payments to the hedge fund. However, sometimes hedge funds use shorter-dated contracts and roll them over if the expected movement has not occurred by the time they expire.

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At an extreme, in five major currencies, there is a rolling spot contract traded at the Chicago Mercantile Exchange that permits a spot transaction to be rolled every day without making or taking delivery of the underlying currency. In the Thai baht, hedge funds presumably acted through a number of counterparties to establish their short baht positions.

Some hedge funds established positions early in and probably rolled them over prior to the actual decline in July. Others established their positions somewhat later and could execute trades in liquid one-month or three-month contracts without needing to roll them. Put options strategies. Another way in which to express an opinion that a currency is likely to depreciate is to buy put options. A put option provides the buyer the right, but not the obligation, to sell at a particular price the strike price during the period leading up to expiration of the option.

If the currency has been tightly managed and most participants expect it to remain within a narrow trading range, the volatility embedded in the price of the option will be low and consequently the option will be relatively cheap.

International Macroeconomics CH2 - Exchange Rates and FX Market, Feenstra

Apparently, such was the case for options written on the Thai baht. A number of large banks allegedly sold put options on the baht to hedge funds. The hedge funds purchased the options as part of the overall strategy of shorting the baht. Put options had the advantage that implied volatility was abnormally low, making them cheap, although they had the disadvantage that the premium had to be paid up front.

There are some variants to the strategy, however, such as selling puts at strike prices that are cheaper than the purchased put further out-of-the-money. This limits the profits as the currency depreciates but also lowers the cost of the original put option. Sovereign bond purchase. A hedge fund may decide that holding Brazilian government debt is advantageous based on an assessment of its economic fundamentals. The fund may decide that a Brady bond purchase is the best way to take advantage of such a decision.

These Brady bonds may be purchased outright from a counterparty investment bank or the hedge fund may decide it does not want the risk of an interest rate move in the United States that would affect the price of the bonds, in which case the fund would short U. The short position could be maintained by borrowing the U. Alternatively, the hedge fund could simply take a short position in the U.

Treasury futures contract with approximately the same maturity date and then tailor the number of futures contracts sold to obtain the correct duration or convexity characteristics to match the Brady bond. In this case, the hedge fund has obtained the credit risk to Brazil it desired without an outright interest rate exposure.

Credit derivatives strategies. More recently, hedge funds have found it convenient to enter into a credit derivative known as a total rate of return TROR swap. For example, the buyer agrees to pay the total return on an emerging market Brady bond, consisting of all contractual payments as well as any appreciation in the market value of the bond; the seller agrees to pay the buyer LIBOR plus a spread and any depreciation in the value of the Brady bond. The TROR swap protects the buyer against a deterioration of credit quality, which can occur even without a default.

A hedge fund may be either a buyer or a seller depending on the credit risk they would like to take on. A more recently developed credit derivative is the credit spread option. This option provides a payout to the buyer when the spread on two underlying assets exceeds a predetermined level. The buyer pays a premium for such protection and the seller provides a payment based on the spread. Some hedge fund experts believe that emerging market hedge funds are the fastest growing segment of the hedge fund industry.

They are classified by region as most focus on a geographic region, although their prospectuses may permit them to trade in a number of different areas. Emerging market hedge funds execute strategies that depend on the economic fundamentals of various countries, but often have components that mitigate certain risks associated with these strategies. Since many of the markets are underdeveloped and illiquid, the size of transactions is relatively small. Often the mispricing of bonds is due to a lack of understanding about how various repayment schedules or restructuring efforts operate.

Bets on the outcomes of various political events also cause differences of opinion and different valuations.

Macro trading and investment strategies pdf

Relative to the Group of Ten countries, emerging market hedge funds pay far more attention to credit risk. In many instances, the trades are executed to profit from differential opinions about the credit risk of the sovereign entity or local institution. Since the volatility of prices and yields is much higher in emerging markets, risk management and the timing of trades become even more critical.

For instance, since , market volatility has ranged from 9 percent to 25 percent for the Emerging Markets Bond Composite index, while volatility in the U. With perhaps the exception of the Brady bond market, liquidity considerations are often present. Sometimes the desired purchase of equity in an emerging market may be so large that it involves acquiring a significant amount of the outstanding shares.

In some countries this may trigger foreign holdings rules or other regulations designed to discourage foreign ownership. Also of concern to some countries is the rapid growth of money managed by these types of funds. While not as large as the more traditional macro funds, emerging market hedge funds are quickly obtaining capital.