Comprehensive Overview of 7 Proprietary Trading Strategies in Interest Rate
1. Rich/Cheap Trade:Concept:
This strategy exploits the discrepancies between the market yield and the theoretical yield of bonds.
Execution: The strategy is to buy when the instrument is considered "cheap" and sell when "rich," based on the Rich/Cheap spread defined as S=YMarket−YTheory
Z-score is used to determine the level of richness or cheapness.
2. Bond/Swap Trade:This strategy capitalizes on the yield spread differences between bonds and swaps.
Execution: It involves taking offsetting positions in bonds and interest rate swaps, typically when the spread is at an extreme value.
Example: Shorting a 5-year swap against a long position in a Spanish government bond (SPGB) was suggested based on spread analysis
3.Curvature Trade:
Based on changes in the yield curve's curvature, primarily the twist movements.Execution: It uses a two-factor model that explains yield curve movements with a level and a twist factor.
4. Spread Trade:
Exploits discrepancies between the yield spreads of different bond instruments or sectors, such as corporate bonds versus government bonds.Execution: This is more risky compared to other strategies but offers higher profit potential, especially in non-dollar bond/swap market
5. Generic Convergence Trading Strategy:
A statistical arbitrage strategy that involves constructing a linear combination of instruments with minimal market exposure.Execution: The trade is executed based on a convergence of price patterns of highly correlated instruments, minimizing variance and focusing on noise in price signals.
6. Box Trade:A complex arbitrage strategy that involves creating synthetic long and short positions using a combination of options or futures.Execution: This requires careful hedging and the execution of multiple trades simultaneously, often used when pricing discrepancies exist between related instruments
7. OAT Floater Trade:This strategy deals with French government bonds (OATs) and floating rate notes that are indexed to the 10-year constant maturity yield index.Execution:
The trade involves constructing a portfolio of OAT floaters with minimal exposure to level shifts and significant exposure to curve twists. The trade is executed based on observed price extremes of the floaters
This strategy exploits the discrepancies between the market yield and the theoretical yield of bonds.
Execution: The strategy is to buy when the instrument is considered "cheap" and sell when "rich," based on the Rich/Cheap spread defined as S=YMarket−YTheory
Z-score is used to determine the level of richness or cheapness.
2. Bond/Swap Trade:This strategy capitalizes on the yield spread differences between bonds and swaps.
Execution: It involves taking offsetting positions in bonds and interest rate swaps, typically when the spread is at an extreme value.
Example: Shorting a 5-year swap against a long position in a Spanish government bond (SPGB) was suggested based on spread analysis
3.Curvature Trade:
Based on changes in the yield curve's curvature, primarily the twist movements.Execution: It uses a two-factor model that explains yield curve movements with a level and a twist factor.
4. Spread Trade:
Exploits discrepancies between the yield spreads of different bond instruments or sectors, such as corporate bonds versus government bonds.Execution: This is more risky compared to other strategies but offers higher profit potential, especially in non-dollar bond/swap market
5. Generic Convergence Trading Strategy:
A statistical arbitrage strategy that involves constructing a linear combination of instruments with minimal market exposure.Execution: The trade is executed based on a convergence of price patterns of highly correlated instruments, minimizing variance and focusing on noise in price signals.
6. Box Trade:A complex arbitrage strategy that involves creating synthetic long and short positions using a combination of options or futures.Execution: This requires careful hedging and the execution of multiple trades simultaneously, often used when pricing discrepancies exist between related instruments
7. OAT Floater Trade:This strategy deals with French government bonds (OATs) and floating rate notes that are indexed to the 10-year constant maturity yield index.Execution:
The trade involves constructing a portfolio of OAT floaters with minimal exposure to level shifts and significant exposure to curve twists. The trade is executed based on observed price extremes of the floaters
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