Lookback Straddle

[rahul.goyl]

Hi david,

Could you plz explain what a Lookback straddle has to do with fixed income convergence.
I cannot link the two. Need your help asap.


The payoff of some hedge fund strategies is commonly identified with the payoff of option strategies.
The payoff of a long look-back straddle correspond best to the payoff of
a. A trend following strategy.
b. A fixed-income arbitrage strategy.
c. A fixed-income convergence strategy.
d. A spread trading strategy.
Answer: c

Thanks
Rahul

 

[David Harper CFA FRM]

Hi Rahul,

The answer (IMO) should be (a) not (c)
...this question refers to Fung & Hsieh reading that has not appeared since 2007

screenshot of old slide below:

so if you just think about a trend strategy where asset price is increasing, a long lookback call profits...so a long lookback straddle (call + put) was the trade they used to operationalize (simulate) a trend-following strategy
.... and a short lookback straddle was used to simulate a convergence trade

David

 

[rahul.goyl]

Hi David,

The Question is from GARP 2008 Practice paper. Still am not very much clear about the convergence by short lookback.
May the answer is just wrong in practice paper.

Thanks for your immediate respond.

Could you also throw intution on the below.

Which of the following statements is INCORRECT about convergence trading?

a.Convergence trading is a popular hedge fund investment strategy.
b.Convergence trading is a non directional investment strategy..
c.Convergence trading is a risk less arbitrage.
d.Convergence trading can be modeled by selling a look back straddle.


Regards,
Rahul