1. www.pairstrading.co.za

2.  Derek Crookes: ◦ Basic introduction to pairs Trading  Jonathan Roche: ◦ Highlights of a Pairs Trading Case Study ◦ Searching for pairs – some tools and methodologies ◦ Tracking Pairs – what is involved ◦ Thoughts on what one needs to trade pairs successfully www.pairstrading.co.za

3.  Trading is risky  This may not be suitable for you  It is your responsibility what you decide to do with your trading  SO this presentation does not contain nor should be construed as investment advice or an investment recommendation www.pairstrading.co.za

4.  ‘Pairs Trading’ is an investment strategy used by many Hedge Funds.  Pairs trading or statistical arbitrage was first developed and put into practice by Nunzio Tartaglia, while working for Morgan Stanley in the 1980s.  Pairs trading was one of the most profitable strategies that was developed by his team which gradually spread to other firms. www.pairstrading.co.za

5.  Asset Arbitrage  Merger Arbitrage  Spread Trades  Spread Inversion  Double Alpha Trades  Differential  Risk Arbitrage  Co-Integration  Correlation  Ratios  Relative value  Co-Variance  Mean Reverting – return to the Average www.pairstrading.co.za

6.  Trading Pairs – Mark Whistler  Statistical Arbitrage – Andrew Pole  Pairs Trading – Ganapathy Vidyamurthy  3 rd Party Price feed into excel  Don’t rely on statistics, or patterns etc, only

7.  The general 'rule of thumb' is to sell overvalued securities and buy undervalued ones.  It is only possible to determine that a security is overvalued or undervalued if the true value of the security is known.  Pairs trading is about relative pricing, so that the true value of the security is not important.  Relative pricing is based on the idea that securities with similar characteristics should be priced more or less the same.  When prices of two similar securities are different, one security is overpriced with respect to its 'true value' or the other one under-priced or both. www.pairstrading.co.za

8.  Long 1 stock and short another stock, generally in the same sector  Eg. IMP vs AMS (Mining – Platinum)  Why do we do this – Trade a Pair?  Reason:  Are you able to determine when the market is going up/down?  Determine a mispricing between 2 securities  to reduce your risk, this is not risk free www.pairstrading.co.za

9.  Same sector instruments  Quick eye ball – overlay the instruments return over the last year or 2  Calculate the relative value – divide the 2 instruments closing prices  Calculate average to determine the relative value(ratio) to the mean – looking at convergence, divergence  What MA do we use?  Determine Std Deviation to enter into a trade with the highest probability of a positive return – Mispricing opportunity  Determine the strategy www.pairstrading.co.za

10.  Long Ned vs Short Std Bank  Both instruments must have the same notional value  Notional value / price = shares  Ned:100 000 / 195.00 = 513 (rounded)  Sbk:100 000 / 124.00 = 806 (rounded)  Nedbank price increases to 211.00  Sbk price increases to 127.00 www.pairstrading.co.za

11.  Margin – 10% (R10 000)  ROWC – 50% rounded www.pairstrading.co.za

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28.  Trading for 10 years  4 Children and Wife  Bsc Mech Eng  MBA  U of CT  This is all he does! www.pairstrading.co.za