Calculating Mixed Eris and Non-Eris Strategies

Three values are used in calculating leg direction in a synthetic strategy: leg price ratio, leg ratio, and leg price direction.

•      leg price ratio = used in price calculation

•      leg ratio = specifies buy/sell side

•      leg price direction = 1 for price, -1 for non-Eris yield, 1 for Eris yield

Leg_direction = sign(Leg_priceratio) * sign(Leg_ratio) * sign(Leg_pricedirection)

Strategies are tradable if the leg direction of all legs in the strategy are the same.

For SPREAD and AGGR synthetic strategies, the system determines buy and sell side legs using the sign of the leg price ratio (buy if positive, sell if negative).

For example:

(a)

SPREAD(2*EP-3*ENQ)

Buying the spread means buying EP and selling ENQ.

EP_direction = sign(2) * sign(1) * sign(1) = 1

ENQ_direction = sign(-3) * sign(-1) * sign(1) = 1

(b)

SPREAD(3*Yield(TYA)-5*Yield(TUA))

Yield(TYA)_direction = sign(3) * sign(1) * sign(-1) = -1

Yield(TUA)_direction = sign(-5) * sign(-1) * sign(-1) = -1

This calculation does not work for strategies that combine Eris and non-Eris legs because the price direction of the Eris yield model is the opposite of other yield models, which results in different leg directions.

For example:

(c)

SPREAD(Yield(LIT)-Yield(TYA))

Yield(LIT)_direction = sign(1) * sign(1) * sign(1) = 1

Yield(TYA)_direction = sign(-1) * sign(-1) * sign(-1) = -1

In this case, the system determines buy and sell side legs using the direction of the first leg only. If the other legs in the strategy have a direction different from the first leg, the leg ratio for each of those legs is changed.

So,

Yield(TYA)_direction = sign(-1) * sign(1) * sign(-1) = 1

(d)

SPREAD(-Yield(TYA)+Yield(LIT))

Yield(TYA)_direction = sign(-1) * sign(-1) * sign(-1) = -1

Yield(LIT)_direction = sign(1) * sign(1) * sign(1) = 1

So,

Yield(LIT)_direction = sign(1) * sign(-1) * sign(1) = -1

The same logic is applied recursively to nested strategies.