Personal Composite Instrument

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Personal Composite Instrument (PCI) – is a class of synthetic financial instruments[1],[2], formed by expression of the base investment portfolio in the units of the quoted portfolio. In mathematical form the value or PCI rate is expressed through the following fraction[4]:

PCI={\frac {\sum _{{i=1}}^{M}N_{i}\cdot P_{B}^{i}}{\sum _{{j=1}}^{N}N_{j}\cdot P_{Q}^{j}}}={\frac {B(USD)}{Q(USD)}}

Here, B and Q represent the value of the base and the quoted portfolios, respectively. In the simplest case, the value of two different assets,for example GOOGLE and APPLE, corresponds to the numerator and denominator.
Trading operations with the PCI are realized in the following way – let us consider BUY operation as an example:

  • Definition of the bought asset’s volume – base part of the PCI;
  • Determination of the quoted part’s volume through the PCI rate;
  • The sale of the necessary volume of the quoted part and the purchase of the base asset.

PCI SELL operation is realized in the similar way.
Like for any synthetic instrument, the goal of composing a PCI is optimization of investment characteristics, such as yield/risk ratio, forecast horizon, analytical volume of information, and many more. Optimization is realized in comparison to all available standard trading instruments. Let us consider the example of market situation, where comparative fundamental analysis of two companies may become less controversial and require less time than the estimation of investment characteristics of a single company in the global market.
In more general case of PCI construction, portfolios with required investment characteristics are used instead of a base and quoted assets.

See also

References

  • Investopedia. "Synthetic Financial Instruments" [1]
  • Reuters. "Glossary - Synthetic_Financial_Instruments" [2]
  • Carley Garner. "How to Create a Synthetic Put".[3]
  • Reuters. "GeWorko Portfolio Trading Method Promises a Revolution in Financial Market" [4]

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