Pair Tarding and Residual Risk: A Case Study Based on the China’s Securities Firm

Abstract

With the development of the financial field, there are more and more hedging strategies accompanied by an increasing number of residual risks in these strategies. These risks are generally ignored by people, resulting in losses. This paper begins with CITIC Securities, the leader in China’s securities industry, and analyzes its large-scale paired trading case, spreading spreads in the A-stock market. Firstly, at the macro trading level, this paper finds that there are still credit risks and liquidity risks in the trading of this investment portfolio by referring to the prospectus of CITIC Securities’ bond offering. It puts forward relevant suggestions to reduce these risks. Next, the focus shifts to the analysis of the portfolio strategy itself. The paper identifies four risk points: stock price rise in advance, abnormal events, reduced hedging opportunities, and market irrationality. It also provides suggestions on how to mitigate losses caused by these remaining risks. For example, setting up profit and loss points, establishing relevant departments to control the remaining risk points, maintaining good customer credit, and improving the company’s credit rating.