A Purchasing Power Parity Value Strategy for Currency Futures

Summary

The strategy ranks currency futures using purchasing power parity data as a currency-value signal. Its description proposes a universe of roughly ten to twenty currencies, estimates fair values using OECD PPP figures adjusted with monthly CPI and exchange-rate changes, then buys the three currencies judged most undervalued and shorts the three most overvalued. It also proposes investing unused cash at overnight rates and rebalancing monthly or quarterly.

The code shown is a narrower implementation: it lists seven currency futures, reads PPP series, and rebalances in January, so it does not implement the described monthly adjustment process. It equally allocates long and short holdings across the selected contracts and applies leverage and a custom fee model. No performance results or benchmark are supplied. The implementation depends on external historical futures and PPP data, and the excerpt does not show how overnight cash returns are captured; these differences and data requirements matter when evaluating any backtest.

Key ideas

• The proposed signal compares currencies using PPP estimates adjusted for inflation and exchange-rate changes.
• The written strategy buys the three lowest-PPP currencies and shorts the three highest-PPP currencies.
• The example implementation uses seven currency futures and rebalances annually in January.
• Long and short positions are equally weighted within their respective baskets, with leverage and fees specified.
• The code differs from the written monthly or quarterly approach and provides no backtest performance evidence.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.