Trading Floor Unveils New Forex Strategy To Strengthen Portfolios
And Reduce Volatility
Released
on: October 19, 2009, 8:20 am
Author: Trading
Floor
Industry: Financial
Trading
Floor has unveiled a new Forex Portfolio Model created by Saxo
Bank's strategy team.
The
Portfolio model offers a way to reduce total portfolio volatility
in the wake of the stock market rally that saw many investors
turn away from Forex
trading.
"Many
investors are staying out of the Forex market - either because
they lost money and have given up, or because they simply don't
know where to put their money," said David Karsbøl,
Chief Economist at Saxo Bank and Trading Floor commentator. "The
Saxo Bank Forex Portfolio Model is a way of re-activating this
idle money by applying them in a low-cost and relatively low risk
fashion."
The
portfolio model is based on the Saxo Bank Fundamental Indices
that measure the underlying economic strength (contraction or
expansion) of 10 currencies: NZD, AUD, CAD, JPY, EUR, GBP, USD,
CHF, SEK, and NOK. This should give a theoretical 45 possible
currency crosses, but the model subtracts the12 most illiquid
and expensive to trade and looks at 33.
The
allocation signals are generated by the spreads in the fundamental
indices and the idea is to always allocate more capital to the
currencies with a relatively strong economic activity (and positive
rate outlook) and fund the positions by going short on the currencies
with weak economic activity (weak rate outlook).
The
model allocates capital after changes in the spreads between the
fundamental indices. For example, if the Eurozone Fundamental
Index suddenly drops relative to the US Fundamental Index, the
model (everything else being equal) would reduce exposure to EURUSD.
Additionally, positions are scaled up or down according to the
volatility of the currency crosses in question so that the expected
risk-adjusted return for positions in EURCHF is the same as for
positions in EURCAD.
"The
model is always well diversified and is always in the market,"
said David Karsbøl. "It is therefore not exposed to
timing issues."
The
model doesn't use stops, since the overall volatility of returns
tends to be low (especially on single leverage). One particularly
interesting feature is that returns tend to be almost completely
uncorrelated to returns in stock markets (correlation = 0.1) and
other risky asset classes (correlation to the CRB Index is 0.11).
In
back testing since 1991, the model has produced annual returns
of 5.34% using single leverage, 10.58% using double leverage and
15.67% with triple leverage.
"Therefore,
if the back-testing is indicative of future returns, it would
make a lot of sense to use part of one's portfolio to allocate
to the FX Model and thereby decreasing overall portfolio volatility
without lowering returns too much or at all, depending on the
leverage used."
About
Trading Floor:
Trading Floor is run by Saxo Bank - one of the most successful
of the new generation of trading platforms. Trading Floor delivers
trading
strategy and knowledge about key industry events and global
trends within commodity markets including CDF trading
and Forex
strategy. Good information drives profitable decision-making,
making Trading Floor an important tool for anyone involved in
the markets. Trading Floor aims to inform, inspire and provide
an entertaining read for the contemporary trader.
For
further media information about Trading Floor please contact:
Andrew Arnold
Saxo Bank A/S
Philip Heymans Alle 15
DK -2900
Hellerup
+45 39 77 40 00
www.tradingfloor.com
2010
