18 votes
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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 ...
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  • 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....
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  • 10.9k
6 votes
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CNY Devaluation: Why EUR up, USD down?

Today (1 day after the fact) the following headline appeared in the Financial Times: "September Fed rate lift-off put in doubt, Fallout from China’s currency move turns market mood". If true, this ...
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  • 9,617
6 votes
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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 ...
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  • 5,062
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 ...
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  • 5,628
5 votes
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Why is there onshore and offshore currency?

Certain regulations in a country might inhibit the values of a unit of currency from being the same within the borders of the country and outside. There might be foreign exchange or banking ...
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  • 211
5 votes

Why is there onshore and offshore currency?

It's because of onshore capital controls; units of currency cannot freely enter and leave the country and so currency held onshore (within the domain of the capital controls) is not fungible with ...
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  • 1,122
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 ...
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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 ...
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4 votes
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What is meant by "position at a given time" in the context of a series of forex trades?

Position here is the residual amount of one or other currency at the end: You gave us: ...
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  • 3,609
4 votes

Why is Indian rupee is stable against the USD even though most other currencies weakening?

To answer this question, lets dive into some of the factors that generally determine foreign exchange rates. I've outlined the two of the most widely discussed factors below. Current account balance ...
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4 votes
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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 $...
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4 votes
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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 ...
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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 ...
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  • 4,798
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.
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  • 850
4 votes
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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 ...
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  • 14.1k
4 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 ...
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3 votes
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Relationshiop between central bank official currency rates and spot forex

Yes, you can use e.g. the ECB daily official foreign exchange rate data as a reliable and consistent daily timeseries. ECB does a fixing at 14:15 CET, by some methodology they call a "daily ...
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  • 1,865
3 votes
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Looking for Research Paper on Creation of Currency Baskets

Perhaps this paper by Hyun Woo Byun and coauthors is what you're looking for: Using a Principal Component Analysis to develop Multi-Currency Trading algorithms in the FX market They apply principal ...
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  • 876
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 ...
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  • 14.1k
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 ...
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  • 14.1k
3 votes
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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 ...
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  • 1,933
3 votes
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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 ...
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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'...
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  • 6,820
3 votes
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What are "local" and "foreign" interest rate in this formula?

When in doubt, write down a diagram like this: ...
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  • 9,107
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 ...
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  • 9,617
3 votes
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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 ...
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  • 2,101
3 votes
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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 ...
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  • 614
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 ...
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  • 4,936
3 votes
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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
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