18
votes
Accepted
If the volatility of pounds/euros = .2 do we know anything about the volatility of euros/pounds?
The trick here is that you're not asking about $\mathrm{Var}\left(\frac1X\right)$.
Imagine one currency is a stock $S$ and the other a stock $Q$. Then the volatility of the exchange is the square root ...
- 333
8
votes
Is trading mean reversion of small principal components of prices profitable?
Within the fixed income space, there's a lot of literature on PCA trading.
The first 2-3 principal component factors (PCs) can typically explain 90-99% of the total variances in yield curve movement....
- 11.4k
6
votes
Accepted
Group name for currencies, equities and other financial products
The most universal name that any "currency (pair)", "equities" or "futures" falls under is either a product or an instrument.
In some ways I prefer product because you can have 2 exchanges allowing ...
- 5,231
6
votes
Relation between ATM, RR and BF
The ATM is an outright position (long 50 delta put and 50 delta call) so the main exposure is vega. It is the riskiest of the three, and demands a higher bid-offer spread from market makers to ...
- 5,891
6
votes
What does **Long Call EURUSD** mean?
First please keep in mind that EUR (and GBP) are quoted "cable". So if the USD EUR exchange rate is quoted as 1.1, for example, that means that (quotation or countercurrency) USD 1.1 = (base currency)...
- 12k
5
votes
CDS currency and reference obligation currency
A reference entity (the debtor that might have a credit event) does not have any currency denomination.
A reference entity might have many outstanding debt instruments. Each instrument is denominated ...
- 12k
5
votes
Currency devaluation and banks' solvency
Simply put, Russian banks (and other institutions) had local assets and hard-currency liabilities.
Local assets lost value not only because they were denominated in a currency that unexpectedly ...
- 12k
4
votes
Accepted
Put-Call Parity on Currency and Binomial Trees
You have forgotten the combinatorial factors for binomial probabilities on your terms. You need $$ {n\choose k} p^n(1-p)^{n-k},$$ not just $$ p^n(1-p)^{n-k}.$$ The second term should have a factor of $...
- 605
4
votes
Accepted
Currency Hedged Excess Return
I think you have the answer in the comment you made. I will again explain with the inverse exchange rate S, and let me represent the forward price of this exchange by f. And let me represent the first ...
- 6,204
4
votes
What does **Long Call EURUSD** mean?
You would actually sell the option to yourself if you were long a Call on EUR and short a Put on USD.
FX is quoted as CCY1CCY2 (e.g. EURUSD) where it shows the amount of CCY2 needed to buy/sell 1 unit ...
- 8,193
4
votes
If the volatility of pounds/euros = .2 do we know anything about the volatility of euros/pounds?
Some additional comments to @Jeremy909. That "problem" is one reason why logs are so useful. See ...
- 8,193
4
votes
How are currency exchange rates on yahoo finance computed?
According to the finance data disclaimer (https://help.yahoo.com/kb/exchanges-data-providers-yahoo-finance-sln2310.html) the source for fx rates is the ICE data service.
- 940
4
votes
Accepted
Should Cross-Currency Basis Swaps exchanging risk free rates trade flat?
You are correct, the currency basis swaps between risk free rates do not trade flat. To understand why , it’s instructive to imagine how to arbitrage it. Pretty easy, it might seem. One would ...
- 16.6k
3
votes
Option Delta Conversion for currency pairs
Since I'm not a FX guru I need to prove the comment of @alex c
A USDJPY 100 call on one dollar has payoff:
max(0, FX-100) Yen
where FX=USDJPY at maturity. A JPYUSD 0.01 call on one Yen has ...
- 16.6k
3
votes
Difficulty understanding put-call parity for currency options
It costs 0.03 dollars for the option to (sell 1 pound/buy 1.5 dollars. Now divide everything by 1.5:
It costs 0.02 dollars for the option to (sell 2/3 pound / buy 1 dollar). Now convert to pounds ...
- 16.6k
3
votes
Accepted
Existential question about currency exchange Risk Factor
There is no contradiction and basically no ambiguity. Furthermore, the kind of product (linear or non-linear) has no bearing on the question. It is really only a question of basic calculus.
Let us ...
- 1,973
3
votes
Accepted
Do we model nominal or real prices of assets?
$S(t)$ is the stock nominal price.
Nothing precludes you from modeling a stochastic differential equation for the stock real price, but that would not be practical for pricing derivatives, as ...
- 5,632
3
votes
Why do higher interest rates increase the value of the currency?
Usually you think of it as a non-arbitrage relation.
The usual formula that should hold in equilibrium (in absence frictions) is the covered interest rate parity. However, for ease of intuition let'...
- 8,062
3
votes
Kingdom of Denmark Nikkei put warrants
I assume you are referring to the sentence in italics (italicization belongs to me) in the following paragraph on pp. 218-219 in Derman's book "My Life as a Quant".
Though no one used that ...
- 1,026
3
votes
Accepted
What are "local" and "foreign" interest rate in this formula?
When in doubt, write down a diagram like this:
...
- 9,332
3
votes
Extract individual currencies
The way central banks do this is to calculate the Effective Exchange Rate for the country in question. Basically this is a weighted average of the other currencies, with the weights chosen to ...
- 10.9k
3
votes
Accepted
Who influences Forex prices and by how much?
Try the BIS Triennial FX Survey, latest was last year. https://www.bis.org/statistics/rpfx19.htm
E.g. https://stats.bis.org/statx/srs/table/d11.4?o=8:TO1,9:TO1 (table showing "OTC foreign ...
- 2,209
3
votes
Accepted
Rolling to a non-front month future contract?
So, a future is basically like a forward. $F_0(T) = S_0e^{T(r_{f,T}-r_{d,T}+x_T)}$
The longer dated you go, the more you have exposure to the stuff in the exponential (rates in the two currencies, and ...
- 624
3
votes
What determined the weights of a currency in the International Monetary Fund SDR basket(2015)?
It's a unit of account (for the IMF and other international bodies') purposes. As well as just a basket of the most liquid and transferable currencies that reserve managers will all hold anyway in ...
- 5,041
3
votes
Accepted
Why can't central bank reserves ever leave the Fed's balance sheet?
As requested: Currency is also a liability of the Fed on its balance sheet. Thx
- 16.6k
3
votes
Accepted
CURRENCY ADJUSTED RETURNS: How to adjust stock returns in foreign currency (e.g., EUR) to local currency (USD)?
If the link is insufficient, does this work?
- 8,193
3
votes
How to fundamentally value cryptocurrencies?
Investing in cryptocurrencies is a wild ride. There is obviously a lot of speculation involved but my question is another one: what are good models to evaluate the fundamental value of ...
- 203
3
votes
Accepted
How to fundamentally value cryptocurrencies?
Having been to a Business school (not sure whether that's a badge of honor or a badge of shame :), I've covered the "established" valuation models, from comparative analysis, to DCF, to CAPM,...
- 5,998
3
votes
Help with reading currency pairs
The quoting conventions are sometimes illogical for legacy/historical reasons.
"CC1/CC2" is usually supposed to mean the amount of CC2 that you'd need to pay to get 1 unit of CC1. CC's are ...
- 12k
3
votes
Help with reading currency pairs
(Too long for a comment)
Having traded spot FX, your knowledge is correct: EUR/USD at 1.0222 means that it costs 1.0222 USD to buy 1 EUR.
The first currency is always the base currency, in the sense ...
- 5,998
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