Strategy 03 · Derivatives
Relative Value
One market against another.
Funding rates, basis and term structure differ across venues, across assets and across expiries because each is priced by its own participants. Those differences can be traded against each other, long the cheap one and short the rich one, with limited net directional exposure. What remains is a view on a spread, and spreads tend to revert.
Across venues
The same contract on two exchanges can carry different funding or different basis because the two exchanges have different customers. Holding the position long where it is cheap and short where it is rich earns the differential without any spot leg. The cost is two counterparties instead of one, and the risk that the two venues’ prices diverge further before they converge.
Across assets
Correlated assets can carry very different funding or basis when speculative attention concentrates in one of them. A relative position (long the neglected asset’s carry, short the crowded one’s) earns the spread if it normalizes. This is the least neutral form of relative value: correlation is not identity, and the position carries the risk that the two assets simply move differently.
Across the curve
Two expiries of the same asset can be mispriced against each other, the near contract too rich relative to the far, or the perpetual’s funding implying a very different rate from the dated curve. Calendar spreads and perpetual-versus-dated positions trade those mispricings with minimal exposure to the asset’s level.
Practice
How Wesvel approaches it
- 01Every relative-value position has a defined spread, an entry level, a target and a stop, recorded before it is opened.
- 02Net directional exposure is measured across the book and held within a small, explicit limit.
- 03Cross-venue positions are sized under both venues’ counterparty limits, not the smaller of the two.
- 04Cross-asset positions are the smallest and most closely stopped, because correlation is the assumption most likely to fail.
More in Derivatives
- Hedging Spot ExposureUsing short futures to neutralize unwanted price exposure on positions held for yield.
- Basis and CarryCapturing the premium of dated futures over spot as it converges at expiry, and the funding equivalent in perpetuals.
- Options and VolatilityHow options are used in the book, for asymmetric hedging, for carry on implied volatility, and for expressing views on how much markets will move.