Forex Derivatives Trading?

[YIFCIMS]

Is anybody here familiar with the forex market?

I'm an undergraduate seeking advice for forex trading, especially derivative products. I think this is a huge area and will have a bright future. I guess an PhD or MFE degree will be beneficial (and even necessary, correct me if I'm wrong) to trading futures, options, etc.

But I would like to know the chance of breaking into S&T as an undergraduate applied math&econ double major and a stat minor with a bunch of graduate level coursework like real analysis, probability theory (based on measure theory) and a focus on macroeconomics.

Can anyone help me out here?

 

[bullion]

Forex derivative is indeed a huge area. Whether you have a bright future in it is not my call. (Depends more on whether you can make money, market fluctuation...) Best way to establish yourself in trading is trading your own money.

S&T is a sell-side word, so I assume you're hoping to break into S&T at a bank or a securities house. Banks follow fairly standard protocols when it comes to undergraduate recruiting through the analyst program, so basically

1) Is your school a target school?
2) Have you done any internship?
3) Do you know anyone on the inside?

If your answer is no to all three, just give up now and walk away. It's not impossible, but your time can be better spent elsewhere given the fierce competitions among experience professionals and industry shrinkage. And no, none of your course work or major matters. They simply have too many qualified candidates to choose from, and "course taken" isn't that high on people's list.

In terms of the value of PhD or MFE degrees, it only matters if the graduate programs have feeder relationships with the desks you want. Otherwise, your chances will be just like everyone else aka slim. Certain programs have strong relationships with banks while others have reputation toward buy-side firms. Don't bother with "I know a guy who got an offer from XXX firm even with bad grades / bad school" comment in this forum. Those aren't the norms and those won't be you. Go through placement reports and see which school places the most PERCENTAGE of their graduates in firms/positions you want. Recruitment is a numbers game, so favorable probability is more way important than how brightly you shine.

Do your due diligence and evaluate the risk of your investment yourself if you ever want to trade derivatives.

 

[YIFCIMS]

Thanks. I appreciate your input.

The three questions definitely are key ones and fortunately I can say yes to some of them. I feel like they are actually correlated since target school => great alumni network resource => high chance to land internships and for non-targets they need to network their ass off and get pretty luck. I mean that's why those non-target hero stories exist, isn't it?

In terms of trading, what's the value of personal accounts? Do they care about it as much as how smart you are? I'm confused with this because banks are going to train you anyways, will they prefer a smart guy and teach him or someone who got a decent record but already developed his own strategies?

And for forex derivatives, does one really need to know stochastic calculus (so that he or she can understand the product) just for trading? I'm sure there are people who don't know high-level math trade well, but what about the more general cases?

Thanks again.

 

[financeguy]

Thanks. I appreciate your input.

The three questions definitely are key ones and fortunately I can say yes to some of them. I feel like they are actually correlated since target school => great alumni network resource => high chance to land internships and for non-targets they need to network their ass off and get pretty luck. I mean that's why those non-target hero stories exist, isn't it?

In terms of trading, what's the value of personal accounts? Do they care about it as much as how smart you are? I'm confused with this because banks are going to train you anyways, will they prefer a smart guy and teach him or someone who got a decent record but already developed his own strategies?

And for forex derivatives, does one really need to know stochastic calculus (so that he or she can understand the product) just for trading? I'm sure there are people who don't know high-level math trade well, but what about the more general cases?

Thanks again.

There is no value place on your personal accounts if you're looking for a job at a bank trading foreign exchange derivatives. Every so often I come across a resume that states that the person has a personal account and then proceeds to list a couple positions they put on that, wouldn't you know it, worked out spectacularly well. Those people usually don't get an interview. If you trade and you're honest about it, that may be a plus I suppose to show you're interested in FX. But I wouldn't expect you to be raking in millions in your PA, and I wouldn't mind if you lost money. Especially in the derivatives space, desks are looking for people they can train, not people who think they can teach themselves from the ground up. It took the industry decades to evolve; how can a person wrestle through that all on his own by the time he finishes college?

You certainly do not have to master stochastic calculus, but you should definitely understand it conceptually. You really need to understand intuitively how the pricing/risk management models work, and for that it's very, very helpful to be able to drill down into the math every now and then. There isn't an FX options trader in the market who isn't proficient in undergraduate level calculus and probability theory. A solid percentage of traders in the market have PhDs and other advanced quantitative degrees. If you land a seat on a desk out of an undergraduate math major, you may have had a more mathematical background than a couple of guys, but you certainly won't be the most advanced academically by far.

 

[bullion]

The three questions definitely are key ones and fortunately I can say yes to some of them. I feel like they are actually correlated since target school => great alumni network resource => high chance to land internships and for non-targets they need to network their ass off and get pretty luck. I mean that's why those non-target hero stories exist, isn't it?

They are absolutely correlated. Success isn't built overnight. You can't suck from HS to College with lousy GPA and crappy school, and only hope for a miracle or with one GRE score to erase all your wrongs. Sure you might get lucky, but life isn't a lottery. A lot of people here seem to hope to get those coveted position through less than stellar background, and we should be really skeptical about their results. All major programs had invested heavily in hiring practitioners as faculty (not cheap), educating hiring managers about their programs, curriculum planning, and alumni coordination to establish themselves. If you want to go to a graduate program, accept nothing but the best. A graduate program that cannot help you distinguish yourself from other job applicants is not worth going at all (especially if you come from other disciplines or foreign countrie).

In terms of trading, what's the value of personal accounts? Do they care about it as much as how smart you are? I'm confused with this because banks are going to train you anyways, will they prefer a smart guy and teach him or someone who got a decent record but already developed his own strategies?

It depends. After all, traders make their lunch through trading profit. And for prop shops, profit and alpha seeking is by far the one and only criterion you need for a job. But as financeguy mentioned, things get a bit complicated with banks. If you compare a trading desks to an Apple store, the sales people are the front area greeters, the traders are the technicians, the back office are the shipping specialists, and the financial instruments are the ipads. Your ability to trade isn't nearly as important as your ability to put the components together correctly and communicate with your clients. Sell-side traders focus more on hedging the market exposure of their inventories, so you work in teams to make sure your bank doesn't get run over by market volatility. (or that's my understanding of them. I only worked in prop)

And for forex derivatives, does one really need to know stochastic calculus (so that he or she can understand the product) just for trading? I'm sure there are people who don't know high-level math trade well, but what about the more general cases?

Stochastic calculus (SC) is only used for designing pricing and hedging strategies. You then use the calculated result as a benchmark to adjust your quotes and hedge your exposures accordingly through arbitrages make sure you don't violate arbitrage bounds (thanks Yike Lu). So for those, you need a thorough understanding of all the greeks (and their behaviors under different market condition) to explain to your clients and control your risks.

For directional trades (prop trading), however, SC is far less useful than general economics and common sense. As computerize trading proliferates and arbitrage margins get depressed, the real money in trading is in directional trading where forecasting and time series analysis are way more important.

 

[Yike Lu]

Stochastic calculus (SC) is only used for designing pricing and hedging strategies. You then use the calculated result as a benchmark to adjust your quotes and hedge your exposures accordingly through arbitrages. So for those, you need a thorough understanding of all the greeks (and their behaviors under different market condition) to explain to your clients and control your risks.

For directional trades (prop trading), however, SC is far less useful than general economics and common sense. As computerize trading proliferates and arbitrage margins get depressed, the real money in trading is in directional trading where forecasting and time series analysis are way more important.

Just a nitpick with your terminology: you do not hedge your exposure through arbitrage. Rather you replicate the payoff as close as you can with vanilla instruments and try to make sure you do not violate arbitrage bounds so that your client doesn't take you. Then you charge a spread. There is no taking advantage of mispricing here - in fact it is your job to avoid putting out an arbitrageable price. Caveat: I come from the buy-side world as well.

 

[YIFCIMS]

financeguy, bullion, Yike Lu

Thanks A LOT you guys. I guess I've been focusing on coursework too much (since I'm also considering MFE/PhD to keep other doors open). I hope some day I can be as helpful as you guys

Personally I think SC would be fun as an advanced math class (I was a total math guy before getting interested in trading) and beneficial since trading is getting more and more quantitative these days. I'm taking grad-level analysis next fall as a junior and hopefully it will help me to understand SC better.

I'm not sure I totally understand arbitrage though. Arbitrage is about taking advantage of price differences, thus a trader who finds the gap of prices between two markets would buy from one and sell in the other immediately, right?

It depends. After all, traders make their lunch through trading profit. And for prop shops, profit and alpha seeking is by far the one and only criterion you need for a job. But as financeguy mentioned, things get a bit complicated with banks. If you compare a trading desks to an Apple store, the sales people are the front area greeters, the traders are the technicians, the back office are the shipping specialists, and the financial instruments are the ipads. Your ability to trade isn't nearly as important as your ability to put the components together correctly and communicate with your clients. Sell-side traders focus more on hedging the market exposure of their inventories, so you work in teams to make sure your bank doesn't get run over by market volatility. (or that's my understanding of them. I only worked in prop)

Well, is a prop trading internship experience valued by S&T in banks? I have an opportunity to trade remotely for a prop firm this summer, would this be helpful?

 

[Yike Lu]

I'm not sure I totally understand arbitrage though. Arbitrage is about taking advantage of price differences, thus a trader who finds the gap of prices between two markets would buy from one and sell in the other immediately, right?

There's the definition of arbitrage, which is what you mentioned (and might I add, extends to any strict mathematical relationship between assets), and there is the practical implications.

In this case you are not looking for arbitrage, rather you are pricing by NO arbitrage. This is extremely important for options market makers and bank derivatives traders as the prices they make cannot allow for arbitrage, otherwise they will lose money by trading. Contrast this with the perspective of a buy-side trader who is looking for arbitrages to take advantage of.

 

[bullion]

...Well, is a prop trading internship experience valued by S&T in banks? I have an opportunity to trade remotely for a prop firm this summer, would this be helpful?

Not really. Their job description is very different. In the past, banks might hire you for the prop desks. Now that banks are shedding the prop desks, they will probably stick with traditional S&T business model (market making, charging commissions, etc). So getting good grades and networking with relevant professionals (on the inside) are really the best and only way to go.