Arbitrage involves calculating theoretical values for derivative products based on implied forwards determined from relationships in the underlying cash markets. Fixed income, money market and foreign exchange relationships are particularly adaptable to these trading concepts.
CME Eurodollar Spreads
The highly liquid Interbank market enables the calculation of forward pricing and convergence differntials that suggest arbitrage trades along the eurodollar futures strip.
Eurodollar Futures at the Chicago Mercantile Exchange is the largest and most liquid futures market in the world. Forward contracts extend out for ten years. Open interest runs over 10,000,000 contracts representing over $10 trillion of value. Daily volume is normally two million contracts. The bid/offer differential on eurodollar spreads is typically one half of one basis point with the sizes in the 6 digit range.
Cash eurodollars (the "Interbank" market) are traded at large money center banks and represent U.S. dollars on deposit overseas. The Bristish Bankers Association sets LIBOR (London Interbank Offer Rate) daily. These are the benchmark rates used for pricing commercial loans and mortgages. We use them to calculate implied forwards that match the maturities of the CME eurodollar contracts.
Hence, Part I to our approach is to calculate a "Rich/Cheap" value for eurodollar futures spreads and butterflies based on this cash relationship. Our calculation allows for compounding and yield curve convexity and is subject to the timeliness, accuracy and bid/offer spread of the quote. The objective is to get a reasonable indication of relative value. This gives us a cash bias for the spread trade.
Part II involves applying our unique GTS Optimization Algorithms™ to time the trade entry points. This allows the trader to determine trade entry cross-over points for smoothing (Moving Averages) and ocillation (Stochastics) based on optimized technical parameters.
To view a screen capture of our "CME Euro$ Arbitrage w/ GTS Optimization v1.0", click on the image to the right.
If you are a trader interested in using this software or an investor interested in money managers who use the software, please contact Greg Smith at GTS Research.
Powered by iTrade™ quotes and GTS optimization algoritms.
|
Our arbitrage algorithms can be adapted to any trading platform where accurate and timely cash prices are available. Contact Greg Smith at GTS Research for information on adapting these low risk trading concepts to your trading environment.
|
|
|
|
|
