Following up on his introduction to the Nikkei 255 futures, Pete talks about Japan's relationship to the Yen and Aussie Dollar. Since the three are related, we dive into a new spread.
In the last episode of Splash Into Futures, we learned a little bit about the Nikkei 225 futures.
In this episode, Pete looks at the Nikkei 225 Futures compared to currency futures from around the area, including: Japanese Yen (/6J), Australian Dollar (/6A), and the New Zealand Dollar (/6N).
By doing some digging into how the currency futures move in relation to the Nikkei 225 index future, Pete demonstrates the correlation between the products using a correlation matrix.
When comparing the Nikkei 225 with Japanese Yen and the Australian Dollar, we found that the Nikkei 225 is highly correlated with the Yen.
The correlation between the Yen and the Nikkei 225 is a negative correlation, meaning that when one goes up, the other typically goes down.
When looking at the correlation over time, we see that the correlation was positive and now is negative, but tends to revert to the mean.
The example trade that Pete puts on to take advantage of the correlation is a spread trade. He sells the /NKD future and buys the /6J future. By putting on a pairs trade with negatively correlated products, it helps to mitigate the risk of the trade.
Strategies: Spread
Products Discussed In This Episode: /NKD, /6J, /6A
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