Currency:
Currency Option Strategy

Pareto believes that the currency market is an example of a complex system, a system which lies somewhere between order and randomness. Its dynamics emerge from the interactions among a large set of participants, who possess different objectives and investment horizons. The intricacy of these interactions leads to a dynamic which is quite often indistinguishable from a random process. However, recent scientific research shows that even such complex systems may still present pockets of predictability, special moments when it is possible to have a higher degree of understanding about properties and driving forces. An interesting feature of currency markets is that the resulting interactions among its participants generate a tendency for the market to gravitate towards unstable equilibrium situations, which may result in sharp market corrections. This feature can be successfully exploited by a trading strategy which displays an asymmetric payoff pattern, as provided by long option positions.

The objective of the strategy is to maximise the total return of a portfolio by investing primarily in long currency option positions.

Pareto seeks to achieve this objective by employing proprietary statistical and trading models that identify and exploit specific features in the structure of currency spot and option market dynamics. These models explore opportunistically what has been termed "self-organised criticality" - the tendency of markets to evolve towards critical unstable states from which sharp corrections may follow. Examples of such environments are trending markets, where a large portion of the market will converge in opinion about the future market evolution, and low volatility environments, where the absence of relevant market moves will force market participants to close or open short positions, creating exposure to an eventual move. This synchronization in market players’ behaviour will eventually break, giving rise to sharp corrections.