Instruments under [PCI] ticker are formed and traded basing on PCI GeWorko model (US patent № P/6096-3). The model enables investors to create personal composite instruments (PCI) from the group of simple assets such as stocks, futures etc. The PCI instruments are destined to trade the portfolio pair similar to the synthetic currency cross-rate trading. Let’s focus on their comparison.
- Let’s compose EUR/NOK cross-rate – euro against Norwegian krone. We shall evaluate the base EUR asset and the quoted NOK asset in a single currency, for example, in the U.S. dollars: EUR(USD), NOK(USD). Put simply, the current cross rate EUR/NOK is the ratio of the currencies quotes at this moment: EUR(USD)/NOK(USD).
- Let’s replace the based (EUR) and quoted (NOK) assets with the random stocks portfolios: GOOGLE+APPLE instead of EUR, YAHOO+MSFT instead of NOK. Asset volumes can be chosen at random as well, for instance, 3 Google stocks and 2 Apple stocks: 3GOOGLE+2APPLE. Henceforward we omit the asset volumes. As a result, the PCI portfolio pair cross rate is formed identically to the EUR/NOK: [GOOGLE+APPLE]/[YAHOO+MSFT]. The rate reflects the GOOGLE+APPLE base portfolio value expressed in the units of the quoting portfolio basing on the “barter” model. The portfolio composition is chosen by our analysts individually while creating each PCI instrument. The chart below represents the weekly candles of the portfolio pair of 5 stocks traded against the Dow Jones index. The quoting area comprises only one instrument which is the DJIA(30).
Pair instrument: portfolio of the Dow Jones top performers against the index itself
- The purchase of one EUR/NOK unit implies buying 1EUR for N units of NOK. The value of N derives from the current EUR/NOK rate. At the time of purchasing there is the parity between the volume of the purchased EUR and the volume of the sold NOK, both expressed in dollars. The N units of NOK are sold and the received funds are spent to purchase EUR. The currency is sold on margin – such speculative trade is called the “short”. Selling EUR/NOK is equal to purchasing NOK/EUR.
- Similarly, the purchase of one unit of [GOOGLE+APPLE]/[YAHOO+MSFT] portfolio pair implies the purchase of GOOGLE+APPLE portfolio unit for N units of the YAHOO+MSFT quoted portfolio. The value of N derives from the current PCI instrument rate. At the time of purchasing there is the parity between the volume of the purchased GOOGLE+APPLE and the volume of the sold YAHOO+MSFT. Selling [GOOGLE+APPLE]/[YAHOO+MSFT] is equal to purchasing [YAHOO+MSFT]/ [GOOGLE+APPLE].
The model allows to trade efficiently within the price range. To get back to the average, two instruments with strong fundamental interconnections are chosen (ex. BRENT+GAS) as based portfolio and the commodity currency (ex. Russian ruble) as quoting portfolio: [RUB]/[BRENT+GAS]. In case of the extremely strong fundamental connection for some period of time the k ratio reflects the proportion between the base and quoted parts prices in a way that [RUB]= k*[BRENT+GAS]. The k ratio derives from the current portfolio rate.
As the exported oil and gas are the major source of budget income, the Central Bank regulates the currency exchange rate depending on the energy prices. In such a case the [RUB]/[BRENT+GAS] portfolio pair fluctuations from the average or outwards the range possibly assume opening long or short position. Moreover, the k ratio is gradually changing overtime due to the changes in the Central Bank’s policy. The long term trends may be considered as well by opening only longs or shorts depending on the long term trend.
PCI portfolio pair: range trading
In the chart above the daily candles of PCI [RUB]/[BRENT+GAS] portfolio pair are depicted. The range that had been formed before June 23, 2014 gave an opportunity to open short position on the instrument after breaking the resistance at 1.67160 and to close it at the level of crossing the middle of the range (dotted line).