An EXO for the Cattle crush...

Quant Strategy development workflow :

Data acquisition, data management and distribution.

Strategy dev(alpha), testing, deployment and monitoring.

Portfolio Management, risk targeting.

Automated or semi-automated trade execution.

Back office trade capture, reconciliation and return reporting.

The value proposition ...

A pre existing set of institutional quality quant tools and deeply experienced personnel

aimed at reducing project risk,

speeding the development time,

and reduce the startup costs of rules based trading, investment and hedging systems.

The Birth of the McNugget

In the early 80's McDs wanted to offer a chicken based product but were concerned that rising chicken prices would force a choice between rising menu prices and squeezed margins .

There was no existing way to hedge chicken but chicken, from a financial point of view, is a combination of corn and soymeal since those are the feed ingredients of the chick.

The Birth of the McNugget

Both corn and soymeal are liquid, exchange traded derivatives products. So a consultant to McD's who specialized in risk consulting and concentrated on actively trading commodities, currencies and other markets suggested ....

the use of a synthetic future composed of corn and soymeal that would effectively hedge the producers exposure to price fluctations allowing them to quote a fixed price to McD's .

The synthetic future in the case above is what we call an EXO.

For the purpose of this illustration we have created two types of indexes:

a style index that represents the trading behavior of a large number of traders engaged in long only trend following style and a separate style index representing the behavior of short only trend following. The collection of "traders" is used to create a select group which represent the style. Periodically different members get included or excluded according to their performance.
a style index representing a passive exposure to a short straddle which is paired with the trend following style above to express yield enhancement through premium collection.

What are we working with?

Require a complimentary strategy or a replication strategy for a cattle crush exposure.
Predominantly a trend following strategy with some elements of yield enhancement.

task :

construct a basket of long only cattle and corn futures.
construct a basket of short only cattle and corn futures.
devise a yield enhancement strategy to dampen trend following return stream.
define a risk target/budget.
Demo the proposed strategy.

Frame the solution:

1. construct a basket of long only cattle and corn futures.

2 . construct a basket of short only cattle and corn futures.

3. devise a yield enhancement strategy to dampen trend following return stream.

enhance long strategies with short ATM calls, short OTM puts.
a new EXO was created to express a premium collection position which will be paired with a long futures signal. If a long strategy engages the following options position is deployed. If the long signal exits the following position is exited.
the tail risk is hedged with deep OTM puts.

3. devise a yield enhancement strategy to dampen trend following return stream. (short side)

enhance short strategies with short ATM puts, short OTM calls.
a new EXO was created to express a premium collection position which will be paired with a short futures signal. If a short strategy engages the following options position is deployed. If the short signal exits the following position is exited.
the tail risk is hedged with deep OTM calls.

task :

Define a risk target/budget.

Demo the proposed strategy.

https://10.0.1.2:8888/notebooks/smart_campaign_generation/Top%20Select%20dashboards/LE_ZC_SmartCampaign_V5_YieldEnhance_Concept_Top_select_V5_Jan_8.ipynb

https://10.0.1.2:8888/notebooks/smart_campaign_generation/Top%20Select%20dashboards/LE_ZC_SmartCampaign_V5_Futures_Only_Concept_Top_select_V5_Jan_8.ipynb