I didn't expect to uncover anything in a model-dependent environment, but I assumed if I found anything it would be the result of the American to European synthetic equivalence.
A few weeks into the fun I began modeling neutral-delta binary range equivalence; in which a neutral touch/hit box is modeled with the minimum platform duration of five minutes. The "barrier/binary range" OTC exotic is a path-independent (Euro convention) exotic; price must strike[outstrike] a point inside[outside] two barrier strikes, but only at expiration. Any trade within those barriers will result in a payout at expiration on the short-gamma variety. The Oanda hit/touch synthetic offers a pure equivalent to the barrier range European exotic, in fact, the x-axis [5-minute duration] on the Oanda trade adds a small residual value over the European binary range.
I found that the average OTC Euro barrier range hedge offered an 18bp edge over the Oanda "skinny hit" equivalent on EURUSD. The Oanda synthetic barrier range trade is actually superior on a touch due to the added duration. The Oanda position should always be priced at a small premium to the Euro barrier range.
I began buying the Oanda hit/BR equivalent in size, but limited to $20,000 globally [user's SSN]. I began recruiting friends and family to open accounts with the proviso that they would not see the OTC hedge. I initially traded small-size to limit dealer-interest and began trading other major pairs to limit scrutiny from concentration in the EURUSD.
It was cumbersome to trade OTC hedges in the Euro binary range, but the OTC vanilla straddle matched on duration was routinely paying double at barrier-touches. The vanilla straddle could also be gamma-traded at the outlier, but I also began to look internally with Oanda to hedge with American small delta hits/touches priced at the outliers. This was huge for the arb, but it required was the recruitment of traders for the long gamma hedges to circumvent the $20k global limit. The Oanda hedge required two independent touch purchases in lieu of the more common OTC trade which allows for a double barrier transaction. Recruiting Oanda accounts for hedging limited the scaling of the arbitrage, so we went back to the conventional straddle and barrier-range hedge with my primary dealer.
Simply, Oanda was pricing the synthetic European barrier-range trade as an American variety -- adding as little as 5-minutes duration would decrease the payout 8-basis points.
I am "knockout" on Oanda's forums.
It's been discussed here:
http://www.elitetrader.com/vb/showthread.php?threadid=120395
Here is a screenshot showing the typical edge late in the game. The trade had already begun to be played-out. The betsfortraders.com price was a few bp higher than the indicative-price from interbank and superderivatives. If you look closely you'll see that the Oanda synthetic showed a duration exceeding an hour. I neglected to price the 5-minute duration for the screenshot, which would've brought the payout to $11.80.
A few weeks into the fun I began modeling neutral-delta binary range equivalence; in which a neutral touch/hit box is modeled with the minimum platform duration of five minutes. The "barrier/binary range" OTC exotic is a path-independent (Euro convention) exotic; price must strike[outstrike] a point inside[outside] two barrier strikes, but only at expiration. Any trade within those barriers will result in a payout at expiration on the short-gamma variety. The Oanda hit/touch synthetic offers a pure equivalent to the barrier range European exotic, in fact, the x-axis [5-minute duration] on the Oanda trade adds a small residual value over the European binary range.
I found that the average OTC Euro barrier range hedge offered an 18bp edge over the Oanda "skinny hit" equivalent on EURUSD. The Oanda synthetic barrier range trade is actually superior on a touch due to the added duration. The Oanda position should always be priced at a small premium to the Euro barrier range.
I began buying the Oanda hit/BR equivalent in size, but limited to $20,000 globally [user's SSN]. I began recruiting friends and family to open accounts with the proviso that they would not see the OTC hedge. I initially traded small-size to limit dealer-interest and began trading other major pairs to limit scrutiny from concentration in the EURUSD.
It was cumbersome to trade OTC hedges in the Euro binary range, but the OTC vanilla straddle matched on duration was routinely paying double at barrier-touches. The vanilla straddle could also be gamma-traded at the outlier, but I also began to look internally with Oanda to hedge with American small delta hits/touches priced at the outliers. This was huge for the arb, but it required was the recruitment of traders for the long gamma hedges to circumvent the $20k global limit. The Oanda hedge required two independent touch purchases in lieu of the more common OTC trade which allows for a double barrier transaction. Recruiting Oanda accounts for hedging limited the scaling of the arbitrage, so we went back to the conventional straddle and barrier-range hedge with my primary dealer.
Simply, Oanda was pricing the synthetic European barrier-range trade as an American variety -- adding as little as 5-minutes duration would decrease the payout 8-basis points.
I am "knockout" on Oanda's forums.
It's been discussed here:
http://www.elitetrader.com/vb/showthread.php?threadid=120395
Here is a screenshot showing the typical edge late in the game. The trade had already begun to be played-out. The betsfortraders.com price was a few bp higher than the indicative-price from interbank and superderivatives. If you look closely you'll see that the Oanda synthetic showed a duration exceeding an hour. I neglected to price the 5-minute duration for the screenshot, which would've brought the payout to $11.80.
