O'Reilly logo

CAIA Level II: Advanced Core Topics in Alternative Investments, 2nd Edition by CAIA Association

Stay ahead with the world's most comprehensive technology and business learning platform.

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, tutorials, and more.

Start Free Trial

No credit card required

25.3 RELATIVE VALUE STRATEGIES

Relative value strategies in commodity markets are best understood as businesses rather than as trading strategies. Relative value managers combine investment capital with expertise in a particular sector to provide economic value-added. They generally compete for profits with vertically integrated commodity firms, merchant banks, shipping companies, and trading firms.

Relative value strategies in commodities can be executed across three risk dimensions: location, correlation, and time. The same commodity can have different prices at different locations in the world. The prices of two similar commodities can diverge from historical norms. The price of the same commodity can be different based on when the commodity is scheduled for delivery. For example, consider a spread trade that is long crude oil for delivery in October in the United Kingdom and short heating oil for delivery in December in the United States. This trade has three risk dimensions: location, correlation, and time.

In contrast, relative value arbitrage strategies in equity and fixed-income markets are generally limited to a single dimension: correlation. A share of stock, when expressed in the same currency, sells at essentially the same price everywhere in the world, so there is no location dimension. Similarly, the price for delivery of a share of stock in the future is determined by its price today and the cost of financing, so there is no time dimension. Commodity traders have ...

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, interactive tutorials, and more.

Start Free Trial

No credit card required