By Richard Williams
Finding alpha within the currencies and futures markets is an area of great practical interest. It also presents many challenges, as has already been noted in this book. In this chapter we will discuss some of the techniques and habits of thought that have been useful in attacking this problem over the last few years.
Futures, in particular, are designed to give the trader exposure to price changes in the underlying market without necessarily having to fund owning the equivalent position in the underlying asset. Within the context of alpha research, short dated forwards on currencies provide the same sort of framework for accessing relative currency value. This means that futures and forwards are extremely convenient instruments for both hedgers and speculators, and give rise to probably the most significant feature we want to consider.
Since both futures and forwards give exposure equivalent to the underlying, it follows that the factors affecting the underlying assets are the ones that drive the price of the future/forward. This simple observation has important implications: there are distinct groups of market traders who are focused on particular groups of futures and currencies; these are the hedgers looking to control their risks to particular factors. Good examples are provided by the commodity futures, where producers and consumers of physical commodities ...