Saturday, July 25, 2009

Weekend reading July 26

Spotters of economic green shoots need lessons in botany: The sharper-than-expected fall in UK economic output announced on Friday shocked those followers of the dismal science who had been expecting a gentler contraction.

NIR Hedge Fund Touted Itself Before Freeze: A hedge-fund firm that has drawn ire from investors and attention from federal regulators promoted its funds' performance last year days before it formally barred clients from withdrawing money.

The rich have never had it so good: According to government figures, 1-percenters' share of America's total income is the highest it's been since 1929, and their tax rates are the lowest they've faced in two decades.

Berlusconi's Sex Tape Scandal Unlikely to Be Fatal in Homeland of Casanova: Italian Prime Minister Silvio Berlusconi will likely survive the sex scandal involving a high- priced prostitute that is dominating the Internet.

Citi Trader, Who Made $100 Million Last Year, Insists on Keeping His Deal in Place: On the surface, the particulars of this case seem simple. A Citigroup commodities trader who says he has a contract that could yield him a $100 million payment this year is crossing swords with the new Treasury pay czar, Kenneth Feinberg.

Euro Threatened with Mounting Deflation Risk, US Bond Auction: The Euro looks vulnerable in the week ahead as headline inflation figures point to the increasing likelihood of deflation while a the US Treasury holds a record-setting bond auction that stands to boost the Dollar at the expense of the single currency.

Consumer-Debt Picture Shows One Sign of Improvement: Fewer American households appear to be falling behind on their debt payments, according to a new study, but some economists question whether the data reflect a meaningful easing of consumer-credit problems.

Great barrier grief: Countries that clung fast to the gold standard in the early 1930s resorted most to protectionism.

Thursday, July 16, 2009

Twitter and Excel

While trying to set up the interval and alert tweets, I have been playing around with Excel as a prototype environment to try to figure out how to do this. Luckily I found this webpage, which really helped me with my efforts, and now I am quite comfortable playing with the Twitter API's. I built a number of simple tools in Excel to help me with my accounts which is very useful, and I can't imagine using Twitter anymore without them. One useful tool is to see the number of friends and followers of a user. I have created a spreadsheet which lets you see the statistics of up to 20 users per request. If you would like to try this spreadsheet I can send it to you. Just leave a comment or send a mail to Let me know how you like it.

Saturday, July 11, 2009

Update on currency tweets

I have updated the tweets on currencies, to do justice to some other highly traded currency pairs. For the US-dollar I have now two accounts. In the existing account the JPY has been replaced by the CHF and CAD, while I created a new account for the main far eastern currencies, JPY, AUD, HKD and SGD. I have also added accounts for the GBP and EUR against the most traded currencies. Obviously this is against the USD and against each other, while I added the CHF and JPY.

I realize this may be a bit much, and undoubtedly the current USD account will remain the most popular. However, I am very curious to see if there will be any followers for the other possibilities that are now offered. These are the current possibilities:
  • FX rates for USD against EUR, GBP, CHF and CAD: 30 min, 60 min
  • FX rates for USD against JPY, AUD, HKD and SGD: 30 min, 60 min
  • FX rates for EUR against USD, GBP, CHF and JPY: 30 min, 60 min
  • FX rates for GBP against USD, EUR, CHF and JPY: 30 min, 60 min

Weekend reading July 11-12 2009

Since there is nothing to trade, the weekend is the time to catch up on reading. Please find below a list of things I find of interest from the internet this weekend:

Britons will be poorer in coming decades

China and the dollar. Yuan small step. The dollar’s role as the world’s main reserve currency is being challenged

Google v Microsoft: Clash of the titans

20 Great Companies with Cheap Stocks

Obama says stimulus plan to kick in later this year

Governator plays it cool over IOUs

Sarah Palin is resigning over money, says Levi Johnston

Unresolved Questions After Hearing With Geithner

Cutting interest rates raises unemployment!

Geithner seeks more control on derivatives

What Does History Teach About Stocks?

Jeremy Siegel is not having a good year

On Wall Street: Credit crisis is far from over

SEC May Gain Expanded Powers to Prohibit Broker Pay, Wrongdoers

Friday, July 10, 2009

The international role of the euro

A study called “The international role of the euro” published by the ECB just came out. The study showed that the currency preferences of the markets are quite stable and only in a limited way influenced by changes in overall financial activity, caused by the global crisis. This is in line with earlier conclusions that the international role of currencies tends to be relatively stable over time. It is however clear that the role of the euro is increasing. In markets that were tracked, like international debt markets, foreign exchange trading and global foreign exchange reserve holdings, the share of the euro increased from one to several percentage points.

Overall trading volume in the foreign exchange market declined quite significantly in 2008. Data from EBS showed that daily average trading volumes declined from USD 226 billion in the first three quarters to 179 billion in the last quarter, a drop of 21%. The report suggests that the drop may have been caused by the lack of trust among dealers in the interbank spot foreign exchange market. Additionally, market participants like hedge funds may have exited the market due to growing risk aversion and increasing costs.

There is also a special focus in the report on the currency choice in the issuance of foreign currency denominated bonds. The interesting conclusion there is that issuers prefer currencies with low nominal interest rates, while possible changes in foreign exchange rates do not have a significant influence on the currency choice.

There is a lot more information and data in the report, and I would suggest any interested readers to browse through it.

Thursday, July 2, 2009

FX alerts on Twitter

You can now also get movements of the major currency pairs delivered to your twitter account. The alerts will be in value terms for intraday movements and in percentage terms for year to date movements. For the year to date movements the alert interval is set at 1%. This means that every time a currency pair on a year to date basis is a percent up or down from the previous alert, you will get notified. For the intraday movements I have set the alert intervals to 0.0025, except for the currency combinations with the JPY and HKD where the interval is currently set to 0.25. The following intervals are now available:

fx_alert_us1: EUR/USD, GBP/USD, USD/CHF, USD/CAD
fx_alert_us2: USD/JPY, AUD/USD, USD/HKD, USD/SGD
fx_alert_eur: EUR/USD, GBP/EUR, EUR/CHF, EUR/JPY
fx_alert_gbp: GBP/USD, GBP/EUR, GBP/CHF, GBP/JPY

The intervals may be a little arbitrary, but we will find out if this leads to too many or too few alerts. I hope you will find the service usefull. Please click on the links to follow.

Wednesday, July 1, 2009

Tracking Euro interest rates

Through you can track calculated values for Euro interest rates for 1,2,3 and 4 years. These rates are calculated from option prices, but follow the yields from government bonds very closely. I have posted an extensive explanation of the methodology here on this blog, both in Dutch and in English. I trust you will find the information useful.

Options as zero coupon bonds

The possibilities investors have with options are almost endless. Almost every view on the markets can be translated in an options strategy where call-options and put-options can be combined in various ways, and the options can be both purchased or sold. Many strategies have wonderful names like butterflies, condors, straddles and strangles, and are extensively described in books and articles. It is however less well known that options can be utilized as an instrument to generate income independently from any movement in underlying rates. The option transforms in a kind of interest instrument, where the investor can decide if he want to be on the paying or receiving end of the strategy. The strategy that I will describe here is essentially the equivalent of a zero coupon bond.

A zero coupon bond is a bond that does not make periodic interest payments, but only pays a certain amount of money, its face value, at a determined date in the future. One payment is followed by one redemption. The initial payment will obviously be lower than the face value and is determined by the required interest rate and the duration of the bond. By taking the actual value of a zero coupon bond, together with the remaining duration and face value, the effective yield to maturity of the bond can be calculated.

Options can also be used to create a cash flow pattern where initially a payment is made and a fixed amount of money is received at the expiration date of the options. This strategy can be set up with any underlying value and any expiration date, but my experience is that it is most efficient with index options on expiration dates with the highest trading volumes. Positions need to be taken with the highest and the lowest available strike prices. The advantage of index options is also that they are usually European style, which means that they cannot be exercised prior to the expiration date. With American style stock options there is always a risk that exercising the option may be efficient and therefore likely. This would obviously disrupt the strategy and influence the outcome.

As an example I use the AEX index options, expiring on December 12th 2012, which are listed on NYSE Euronext in Amsterdam. This exchange is very efficient for investors, with good liquidity and narrow spreads. Although in practice index options are always settled at the expiration date, I will assume in this example that the index is actually a deliverable underlying value. The result of this assumption is the same, but it makes it easier to describe the strategy.

By creating a combination of a purchased call-option and a sold put-option with the same strike price and the same expiration date, a position is created where with certainty the index will have to be purchased at the expiration date for the lowest available strike price, which in our example is 80. If the index is higher than 80 at the expiration date, the investor will exercise his right to buy the index at 80. If the index is below 80, the buyer of the put-option will sell for 80 to the investor. Because of the low strike price compared to the actual index value, the call-option will be very expensive, and will consist almost entirely of intrinsic value. The put option, which is far out-of-the-money will have a low value.
In a comparable way we can also create a position where with certainty the index will be sold at the expiration date of the options, by buying a put-option and selling a call-option, again with the same strike price, which in this case will be 640. When the index is below 640 on the expiration date, the investor will exercise his put-option right and sell the index for 640. If the index expires above 640, the investor will have to sell the index to the buyer of the call-option for 640. Either way, the index will be sold for 640. Because in this case the strike price of the put-option is well above the current index value, this option will have a high value, while now the call-option has a low value.

For this example I have taken the closing prices of Thursday June 25th, when the index closed at 254.12, and I have assumed that trading is possible at the mid prices between the bid and ask prices. The premiums are the following (all in Euro’s):

Buy call-option 80 -161.85
Sell put-option 80 +2.25
Sell call-option 640 +0.58
Buy put-option 640 -356.50

Net payable premium -515.52

On the expiration date at the end of December 2012, we will have a situation where with certainty the index will be purchased for 80 and sold for 640. This leaves a certain difference of 560.
Since we both know the initial cost of 515.52 and the final amount of 560, it can be determined what the effective return is on an annual basis. The implicit interest rate for the period of almost 3.5 years can be calculated to be 2.4% on an annual basis. An investor who believes that this is not an attractive return can decide to receive premium at the start of the strategy, which will give him an effective financing rate of 2.4%. However, this investor will need to have sufficient margin in his account and also needs to carefully consider how the received premiums are to be invested.

In Amsterdam, index options are listed until December 2013, which gives the possibility to calculate the strategy for 5 periods from 2009 to 2013. Through interpolation it is possible to determine a zero coupon yield curve for a 1-4 year period, which can be compared with the return on government bonds. The disadvantage of government bonds is that these normally can only be purchased, while the zero coupon curve of options can be both purchased and sold. The following graph shows how close both curves follow each other:

I find the zero coupon curve from options very useful, not just for trading purposes, but also as an information tool about the development of interest rates. Speculators with a certain view on the interest rate can also benefit from tracking the curve and trade accordingly. Investors who are interested in tracking these Euro interest rates, derived from options, can follow them through twitter, where I post actual calculated rates on a time schedule. The URL for these rates is

Opties als zero coupon obligatie

De mogelijkheden die beleggers hebben met opties lijken oneindig. Vrijwel elke visie op de beurs kan vertaald worden in een optie strategie, waarbij call-opties en put-opties op allerlei manieren gecombineerd kunnen worden, en de opties zowel gekocht als verkocht kunnen worden. Veel strategieen hebben prachtige namen gekregen en zijn uitvoerig beschreven in vele boeken en artikelen. Het is echter minder bekend dat opties ook uitstekend gebruikt kunnen worden als instrument om inkomsten te genereren, die onafhankelijk zijn van welke koersbeweging dan ook. De optie wordt hiermee een soort rente instrument, waarbij de belegger zelf kan bepalen of hij aan de ontvangende of aan de betalende kant wil zitten. De constructie die ik hier zal beschrijven is eigenlijk gelijk aan een zero coupon obligatie.

Een zero-coupon obligatie is een obligatie, waarbij geen periodieke rente wordt ontvangen, maar waarbij op een vastgestelde einddatum de vooraf bepaalde aflossingswaarde wordt uitgekeerd. Er wordt dus eenmalig een storting gedaan (of een aankoop op de beurs), die gevolgd wordt door een eenmalige uitkering (of een verkoop op de beurs). Het bedrag van de eenmalige storting zal lager liggen dan de eindwaarde en bepaald worden door de looptijd en het rendement van de obligatie. Door de actuele waarde van de zero-coupon obligatie op enig moment te nemen, samen met de resterende looptijd en aflossingswaarde, kan ook worden vastgesteld wat het effectieve rendement op jaarbasis is.

Met opties kunnen we ook een constructie maken, waarbij eenmalig betaald moet worden, en waarbij op een vastgesteld moment in de toekomst weer een zekere ontvangst zal plaatsvinden. Deze constructie kan met elke onderliggende waarde en elke looptijd opgezet worden, maar uit onderzoek is mij gebleken dat de meest efficiente manier om een dergelijke strategie op te zetten gaat via AEX index opties met de december expiratie maanden. Hierbij dienen dan posities te worden ingenomen met zowel de hoogste als de laagste beschikbare uitoefenprijzen. Het voordeel van de AEX index optie is ook dat deze van het Europese type is, hetgeen betekent dat de optie niet tussentijds uitgeoefend kan worden. Bij opties op aandelen kan het voorkomen dat tussentijds uitoefening zinvol is, waarmee de constructie verstoord zou worden.

Als voorbeeld zal ik de AEX opties nemen die expireren op 21 december 2012. Alhoewel in de praktijk bij index opties alleen de prijsverschillen worden afgerekend, zal ik in het voorbeeld aannemen dat de index daadwerkelijk geleverd wordt. Het resultaat van deze aanname is hetzelfde, maar het maakt het voorbeeld makkelijker volgbaar.

Door een combinatie te nemen van een gekochte call-optie en een geschreven put-optie met dezelfde uitoefenprijs en dezelfde looptijd, wordt een positie gecreëerd waarbij met zekerheid de index zal moeten worden gekocht voor de laagst beschikbare uitoefenprijs van 80. Als de index op de expiratiedatum boven de 80 eindigt zal de belegger zijn call-optie uitoefenen en de index kopen. In het geval de index lager dan 80 expireert zal de koper van de put-optie zijn aandelen aanbieden en moet dus ook de index voor 80 worden aangeschaft. Door de lage uitoefenprijs ten opzichte van de huidige index waarde, zal voor de call-optie fors betaald moeten worden, terwijl de put-optie een lage waarde heeft.
Nu kunnen we ook een positie creëeren, waarbij de index op expiratiedatum met zekerheid zal moeten worden verkocht. Dit kan door een put te kopen in combinatie met een geschreven call ook weer met dezelfde uitoefenprijs, die in dit geval 640 bedraagt. Bij een index waarde onder de 640, zal de belegger via de gekochte put-opties de index verkopen voor 640. Bij een index waarde boven de 640 op expiratiedatum zal de belegger door zijn verkochte call-opties de index ook moeten verkopen.
Vanwege het feit dat de uitoefenprijs van de put-optie ver boven de huidige index waarde ligt, zal ook hier weer veel premie moeten worden betaald, terwijl de opbrengst van de verkochte call-optie bescheiden is.
Voor het voorbeeld heb ik de slotkoersen van donderdag 25 juni genomen, met een AEX slotstand van 254.12, terwijl verondersteld is dat gehandeld kon worden op de middenkoersen. De netto betaalde premies om deze strategie op te zetten zijn als volgt:

Koop call-optie 80 -161.85
Verkoop put-optie 80 +2.25
Verkoop call-optie 640 +0.58
Koop put-optie 640 -356.50

Netto te betalen premie 515.52

Op de expiratiedatum eind 2012 ontstaat de situatie dat de index met zekerheid voor 80 gekocht zal worden en gelijktijdig met zekerheid voor 640 verkocht zal worden. Hiermee ontvangt de belegger dus het verschil van 560.
Nu we zowel de aankoopkosten van 515.52 kennen, als de verkoopopbrengst van 560, kunnen we ook bepalen wat het effectief rendement op jaarbasis is. Deze impliciete rentevergoeding voor de periode van 3.5 jaar kan worden bepaald op 2.40% op jaarbasis. De belegger die van mening is dat dit geen aantrekkelijk rendement is voor een nagenoeg risicovrije belegging kan overwegen om juist eerst premie te ontvangen. Hiermee zijn de financieringskosten 2.40% voor deze belegger. Om dit te kunnen doen zal er echter wel voldoende bestedingsruimte beschikbaar moeten zijn. Ook zal deze belegger zorgvuldig moeten overwegen wat hij vervolgens met de ontvangen premies daadwerkelijk kan doen.

Daar AEX-opties genoteerd zijn tot December 2013, kan de strategie berekend worden voor 5 periodes van 2009 tot 2013. Via intrapolatie kan vervolgens ook een zero coupon yield curve bepaald worden voor de periode 1-4 jaar, die zich goed laat vergelijken met het rendement op staatsobligaties. Het nadeel van staatsobligaties is echter dat deze alleen gekocht kunnen worden, terwijl de zero-coupon curve van opties zowel gekocht als verkocht kan worden. In de volgende grafiek is zichtbaar hoe dicht beide curves bij elkaar liggen.

Ik vind de zero-coupon curve van opties dermate interessant dat ik hem dagelijk actief bereken om de ontwikkeling van de rente te volgen. Ook kan deze curve nuttig zijn voor beleggers met een bepaalde rente visie. Voor hen kan de strategie als speculatief instrument dienen. Beleggers die geïnteresseerd zijn in deze curve kunnen deze volgen via twitter, waar ik elk uur de actueel berekende effectieve rentes plaats. De URL is