Correlation Between US Dollar and Cotton

Can any of the company-specific risk be diversified away by investing in both US Dollar and Cotton at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining US Dollar and Cotton into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between US Dollar and Cotton, you can compare the effects of market volatilities on US Dollar and Cotton and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in US Dollar with a short position of Cotton. Check out your portfolio center. Please also check ongoing floating volatility patterns of US Dollar and Cotton.

Diversification Opportunities for US Dollar and Cotton

0.49

Correlation Coefficient

US Dollar  Cotton

Very weak diversification

The 3 months correlation between DXUSD and Cotton is 0.49. Overlapping area represents the amount of risk that can be diversified away by holding US Dollar and Cotton in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cotton and US Dollar is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on US Dollar are associated (or correlated) with Cotton. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cotton has no effect on the direction of US Dollar i.e., US Dollar and Cotton go up and down completely randomly.

Pair Corralation between US Dollar and Cotton

Assuming the 90 days horizon US Dollar is expected to under-perform the Cotton. But the commodity apears to be less risky and, when comparing its historical volatility, US Dollar is 2.38 times less risky than Cotton. The commodity trades about -0.13 of its potential returns per unit of risk. The Cotton is currently generating about -0.03 of returns per unit of risk over similar time horizon. If you would invest  6,848  in Cotton on December 29, 2024 and sell it today you would lose (159.00) from holding Cotton or give up 2.32% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	100.0%
Values	Daily Returns

US Dollar  vs.  Cotton

US Dollar

Risk-Adjusted Performance

Very Weak

Over the last 90 days US Dollar has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, US Dollar is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Cotton

Risk-Adjusted Performance

Very Weak

Over the last 90 days Cotton has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, Cotton is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with US Dollar and Cotton

The main advantage of trading using opposite US Dollar and Cotton positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if US Dollar position performs unexpectedly, Cotton can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in Cotton will offset losses from the drop in Cotton's long position.

The idea behind US Dollar and Cotton pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

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Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Money Managers module to screen money managers from public funds and ETFs managed around the world.