Hi there, just wondering if anyone could advise;
Does PRT backtesting allow for the cost of overnight funding to be taken into account? or would i have to rely on excel to do this?
here are my thoughts:
Current IG overnight funding rate = libor ( 0.8% ) + 2.5% pro rata = 0.33%
Based on my own swing trading (equities) this equates between £5-6 per month per £100 risked (R). Clearly the longer i’m in the trade the more the funding cost increases and my expected return. If I am seeking to optimise my Risk:Return ratio (RR) then
E using prorealtime = pRR – pR
E in the real world (or excel) = p(RR-(tN*0.33%)) – p(R+(tN*0.33%))
Complicated way of saying, funding hurts me whether i win or lose, and the RR curve will be skewed to the left by the cost of funding. At some point there will be threshold where it’s cheaper to buy the futures trade than the DFB. Clearly buying the security for cash is also an option but this doesn’t allow the leverage i’m looking for.
This problem can be overcome in Excel so i was just wondering if others had gone through the same process (or if there is a smarter way to do it)? Happy to share my spreadie with those who would be interested.