Dwayne Strocen, President of Genuine Trading Solutions says once upon a time a Commodity Trading Advisor was content to be known as a Portfolio Manager trading commodities and futures for a managed futures fund. There is no question today’s investor has become more sophisticated. In response, today’s selection of investment products has become ever more complex and varied, the need for the CTA to understand the uses and management of these products becomes even more acute.

So what exactly is the role of today’s Commodity Trading Advisor. Certainly trading of derivative products for a managed futures fund continues to be as important as before. A CTA has also become more involved with derivative analytics. This role is essentially focused upon becoming an analyst to structure and analyze the more multi-faceted requirements demanded by hedge funds, pension funds and structured products.

The use of derivative analytics to manage the adverse risk of an equity or bond portfolio brought about by adverse market conditions is critical in preserving asset growth. The uses of hedging to prevent volatility has long been understood by the largest institutions but is now available to the smaller sized company and to the individual investor. No doubt as products continue to evolve so too will the CTA evolve to meet the need of today’s professional money manager.

Derivative products are no longer limited to exchange traded commodities futures and options. There continues to be an ever expanding list of over-the-counter derivative products. These are SWAPS. SWAPS and privately transacted products transacted without the use of a recognized exchange. The difficulty is the buyer and seller must find each other to undertake such an arrangement, not always easy. The second problem is no liquidity. There is no one to sell this too should one of the parties wish to terminate the transaction prior to the agreed upon date.

A Commodity Trading Advisor’s role is no longer sufficient to be limited to trading. It is now imperative to understand the industry in a new light so to understand the changing investment environment. Analysis now becomes the catalyst to include a value added service to retain customers. This includes structured products, risk management and OTC derivatives. Continuing education has been and continues to be the hallmark of the best in the industry.

The days of buying and holding stocks and mutual funds for years are gone; nowadays, futures and option markets offer some of the best opportunities to make money trading in volatile times. But like all investments, high risk is involved, and in order to become a successful trader you must be prepared to work as a geopolitical analyst, a money manager, and an expert in all types of commodity markets. Futures & Options For Dummies will show you how trading is done and how to survive and succeed in these ever-changing markets. Filled with nuts-and-bolts advice, you’ll soon discover how to manage the risks involved and reap the rewards of futures and options trading. This straightforward guide gives you the tools you need to understand: Ins and outs of trading futures and options How to analyze the markets and develop strategies Interest-rate futures and speculating with currencies How to stock up on indexes The direction of commodity fut (more…)

Forex is derived from the words FOReign EXchange and involves the trading of currencies. Until relatively recently trading forex has been the preserve of banks and other large financial institutions. In the last 5 years forex trading has literally exploded among ordinary traders. When the advantages of forex trading become apparent this is not surprising. The forex market is the largest financial market in the world with an estimated daily turnover of $1.5 trillion dollars. This is 30 times larger than all the US stock markets combined. Further more the forex market is open 24 hours a day 5 days a week.

The size of the forex market is one of its first benefits. The forex market is very liquid and has high volume. Liquidity is a great asset many traders look for because it means a deal can always be done. Forex is a continuous 24-hour market. This is very desirable if you wish to trade part-time as you can choose what time you trade unlike stock markets that are open only 8 hours a day. This 24-hour market almost removes the problem of gapping. Because most stock markets are only open 8 hours a day often-overnight events can cause stocks to gap up or down. Large gaps can especially cause large losses for people who trade derivative products like futures or options. In the forex market the problem of gapping is very much reduced.

Currencies are always traded in pairs. Usually currencies are traded in pairs against the US dollar. The main pairs are US dollar Vs EURO ( EUR), British Pound (GDP), Swiss Franc (CHF), Japanese yen (JPY), Australian Dollar (AUS), New Zealand Dollar (NZD) and the Canadian dollar(CAD). There are other currencies pairs but most traders prefer to trade the pairs above. These currency pairs are known as the majors. Currency traders have plenty of trading opportunities from these 7 major currency pairs. Compare this against the stock market where more than 8,000 stocks trade on the three primary US stock exchanges and currency traders can focus just on these 7 pairs and still make plenty of money.

Unlike the stock market there is never bullish or bearish market conditions. Currencies go up or down against each other according to how the world financial markets perceive the value of the currencies. You can sell a currency (go short) just as easy as you can buy a currency( go long). Currencies go up and down and you can trade either direction just as easily ensuring there is always plenty of trading opportunities.

Forex brokers don’t charge commission or brokerage. This can be quite a large overhead in other financial markets. Forex brokers make their money on the difference between the bid/ask spread of a currency pair. As the forex market is very liquid the spread between the bid/ask is very small. As many stock traders know brokerage can be a significant transaction cost.

You can start trading forex for as little as $300 dollars. There are two types of accounts a mini forex account and regular forex account. Most forex brokers offer 100: 1 leverage which means a in a mini account you can control $10,000 currency position with $100.

In a regular account $1000 controls a $100,000 currency position. This provides great leverage and an extremely efficient use of trading capitol.
Trading a mini account is a great way on how to learn to how to trade forex. When you paper trade you are having a comfortable armchair ride. You are trading without the emotions of putting real money on the table. When you trade a 1 mini currency lot you can set your stop loss so the most you lose is $100. This is a great way to learn how to trade effectively without risking much money. In most other trading products even when trading with the smallest trading lot possible you would have to risk much more. Forex provides trading opportunities for people without much trading capitol.

Many traders have overlooked forex trading. It has many benefits that all traders can use to their advantage. It offers the benefit of trading 24 hours a day in any country in the world. The forex market is a very lucrative market no trader can overlook it.

Economists use the term “global labor arbitrage” to refer to the tendency of manufacturing jobs to flow towards whichever country has the lowest wages per unit output at present and has reached the minimum requisite level of political and economic development to support industrialization. 

Sports arbitrage – numerous internet bookmakers offer odds on the outcome of the same event.  One problem with sports arbitrage is that bookmakers sometimes make mistakes and this can lead to an invocation of the ‘palpable error’ rule, which most bookmakers invoke when they have made a mistake by offering or posting incorrect odds.

 Exchange-traded fund arbitrage – Exchange Traded Funds allow authorized participants to exchange back and forth between shares in underlying securities held by the fund and shares in the fund itself, rather than allowing the buying and selling of shares in the ETF directly with the fund sponsor.  When a significant enough premium appears, an arbitrageur will buy the underlying securities, convert them to shares in the ETF, and sell them in the open market.  When a discount appears, an arbitrageur will do the reverse.As a result of arbitrage, the currency exchange rates, the price of commodities, and the price of securities in different markets tend to converge to the same prices, in all markets, in each category.  More generally, international arbitrage opportunities in commodities, goods, securities and currencies, on a grand scale, tend to change exchange rates until the purchasing power is equal.   At the heart of the Arbitrage philosophy is the belief that a man must capitalize on opportunities and take calculated risks in order to be successful.  In the end, we all must engage in Arbitrage.  ” In this sense, any trader who buys something in one market—whether it is a commodity like grain, financial Securities such as stock in a company, or a currency such as the Japanese yen—and sells it in another market at a higher price is engaged in arbitrage.  In economic theory, arbitrage is a necessary activity in any market, helping to reduce price disparities between different markets and to increase a market’s liquidity (ability to buy and sell). 

 Triangular arbitrage is a trading strategy involving placing three concurrent trades in three markets in an attempt to profit from imbalances between the markets.  Triangular arbitrage forces the cross-rates to be internally consistent.As indicated above, triangular arbitrage is a specific trading strategy that involves three currencies, their correlation, and any discrepancy in their parity rates. Thus, there are no arbitrage opportunities when dealing with just two currencies in a single market. Their fluctuations are simply the trading range of their exchange rate.

Triangular arbitrage opportunities do not happen very often and when they do, they only last for a matter of seconds.  Triangular arbitrage among currencies, once only a theory, is now common practice for those with access to large amounts of money

Using triangular arbitrage strategies on forex market has one salient advantage: Predetermined profits can be realized if the trades are executed smoothly. Unfortunately, the disadvantages of this strategy are numerous:• Higher Transaction Costs• Higher margin requirements• Precision timing is required• Complexity• Advanced monitoring techniques are usually required

***This article is strictly for  informational proposes  and does not provide individual, customized investment advice. The money you allocate to futures or forex should be strictly the money you can afford to risk. Detaileddisclaimer can be found at http://www.prolificinvestment.com/prolific.php?page=riskwarning

A derivative is a financial instrument that derives its value from the values of other underlying variables, which, in most cases, are the prices of the traded asset. Derivatives are traded since 1848 on the Chicago Board of trade (CBOT, www.cbot.com) to bring farmers and merchants together and standardize the quality and quantity of the goods exchanged. This is how the first futures contract was created, which led, in 1919, to the establishment of a rival futures exchange, the Chicago Mercantile Exchange (CME, www.cme.com). Today, derivatives are traded both in over-the-counter markets and exchange traded markets.

Most financial assets are traded in the spot market where ownership of the asset and the amount to acquire ownership are exchanged between buyers and sellers. However, in some cases, entering into a transaction immediately and exchanging the asset and the money at a future date, seems more profitable. Derivative securities, such as forwards, futures and options, have been introduced to shift the risk to market participants, who can bear it, and usually at a lower cost than investing in the cash market.

(a)    Forward Contract

A forward contract is an agreement between two parties to buy or sell an asset at a certain future time for a specified price. Forward contracts are traded on over-the –counter (OTC) markets, typically between financial institutions or between a financial institution and one of its clients.

The mechanism of a forward contract requires one party to buy the underlying asset assuming a long position at a certain future time for a specified price and the other party to sell the underlying asset assuming a short position at a certain future time for a specified price. However, as forward contracts are not standardized, they are not liquid. The buyer or the seller may withdraw from the forward agreement at any time and look for another party to make a forward agreement with if she thinks it would be more profitable. Also, forward contracts are susceptible to default or credit and they may not be executed as planned if the buyer cannot raise the cash needed to purchase the asset or the seller commits fraud and does not deliver the asset.

(b)   Futures Contract

A futures contract is an agreement between two parties to exchange (buy or sell) an asset at a certain future time for a specified price. Unlike, forward contracts, future contracts are traded on the exchange markets. This requires the exchange to set certain standardized features for the contract.

The mechanism of a futures contract obliges the owner to purchase the underlying asset according to the standardized terms and conditions set from the exchange concerning quality and quantity of the underlying asset and expiration dates. This allows futures contracts to have less liquidity risk than forward contracts and be traded like common stocks on secondary markets. In addition, futures contracts have less credit or default risk than forward contracts because both parties are requires to deposit funds in a margin account, which is typically the 3 to 6 percent of the value of the contract. These funds are added or subtracted from the margin account on a daily basis reflecting the daily price changes in the futures contract. Therefore, futures contracts are marked to market, meaning they are cash-settled daily.

(c)    Options

An option gives an investor the right to buy or sell an underlying asset at a specified price on or before a specified date. The right to buy the underlying asset assuming a long position by a certain date for a certain price is a call option. The right to sell the underlying asset assuming a short position by a certain date for a certain price is a put option. Options are traded both on exchanges and in the over-the-counter markets. The price in the contract is known as the exercise or strike price, while the date in the contract is the expiration date or maturity. 

The mechanism of an option contract does not oblige the holder to exercise the right. This is what distinguishes options from forwards and futures, where the holder is obliged to buy or sell the underlying asset. Buying an option carries a limited risk of loss, which is the cost of the premium price (the cost) of the option if it expires worthless and an unlimited opportunity for gains as the strike price and the price of the underlying asset diverge as the maturity date approaches. On the other hand, selling an option offers a limited opportunity for gaining the option premium if the option expires worthless, and the risk of unlimited losses, which depends on how much the strike price and the price of the underlying asset diverge.

Forwards, futures and options are used in a variety of ways from individual investors, but also from corporations. The main reason why derivatives markets are so attractive is because they attract different types of traders and have high liquidity. This means that when an investor wants to take one position of a contract, there is usually no problem in finding another investor willing to take the opposite position.

On the other hand, being highly versatile, derivatives provide unlimited leverage, which actually demands a liquidity that far exceeds the market’s potential. There are cases, that risk managers miscalculate volatility assumptions, typically resulting in large losses for the firm. Also, traders who have the authorization to hedge risks or follow arbitrage strategies may become consciously or unconsciously, speculators.

In conclusion, using derivatives in a well-diversified portfolio is a good way to leverage the risk associated with financial and commodity markets. However, the use of derivatives should be carefully structured.