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Trading across different markets we apply mathematics to finance creating fascinating algorithms

FX Options relative Value Trading

Decentralized Opportunity

The foreign exchange options market is primarily an over-the-counter decentralized market. The market is considered one of the most liquid option markets in the world and has a daily turnover of over $300 billion in notional value. Banks act as independent market makers to their client base. Bank flows largely originate from buy side funds, corporations, and private clients. While these flows are varied, investors generally use options to take a directional view while companies are buying insurance intended to hedge foreign exchange exposure.

FX Option volatility surfaces in each currency pair can get distorted as market flows disrupt particular areas of the curve. Monetizing these inefficiencies presents a challenge due to a high barrier of entry on the buy side, a result of asset complexity, market access and technology requirements. Our trading team has built a sophisticated risk management system allowing us to closely match the market implied volatility pricing across all tenors and expiries. From there our proprietary risk models then enable us to accurately predict how implied volatility curves will change.

Constructing a Portfolio

This unique view coupled with an algorithm which monitors our positions so we stay within our risk limits helps us build a relative value portfolio buying undervalued options against selling overvalued options on a single currency pair.

At its core the algorithm utilizes our proprietary risk models to find ways to enter long gamma and vega positions cheaply while maintaining our complex array of risk limits and stress scenarios. Each day the algorithm provides trade suggestions within each pair which is then executed by our trading team. We trade a mix of G10 and well established emerging market pairs.

Versatile Market Adaptability

While the current focus is FX, we believe it can be effective across most liquid option markets. Models will be developed to backtest the strategy in exchange traded option products increasing scale and diversifying returns.

Once these are developed it is feasible to leverage our risk management systems and trading experience to build an automated market making business. As lines blur between the buy and sell side we are well positioned to take advantage of opportunities in either direction.

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FX Options

Energy