9

In 1945 at Bretton Woods, the war-time allies agreed on an international gold standard to stabilise the world's economy. Gold was fixed at \$35 / ounce and all other currencies were pegged to that price via the US dollar. The US became the reserve currency of the world. The problems for the US began immediately. In order to ensure liquidity – an ...


8

OpenGamma has a good resource for market conventions.


7

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. It's also nice, because the first PC looks like a change in the overall level of the yield curve, the second PC looks like a slope change, while the third ...


6

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 would certainly explain why the USD declined (i.e. the interest rate rise that everyone expected has been postponed). However, in my experience it is very hard to ...


5

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 regulations. For example, the eurodollar rate is different from the dollar inside the US, since there are reserve requirements dictated by the Fed. Basically, same ...


4

Position here is the residual amount of one or other currency at the end: You gave us: Time | Amount | Rate | t1 100 1.2636 t2 -1000 1.2599 t3 200 1.1612 Assuming the Amount is amount paid in USD, and the rate is EUR/USD: Time | Amount | Rate | EUR balance | USD balance t0 0 0 t1 ...


4

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 currency held elsewhere. Hence, due to the limitations of arbitrage, those two currencies are not tightly coupled. They are related, since actual physical onshore ...


4

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 An economy's current account is a component of an economy's balance of payments and is a measure of the economy's financial transactions with the rest of the ...


4

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 $6$ and the third should have a factor of $15,$ etc.


4

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 you to trade BTC-USD or AAPL, these are fundamentally the same fungible instrument, but these are 2 different products because they have different trading fees. ...


4

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 time by 0 and the second by t, no more multi-period as in the previous answer! Now the unhedged asset value at next step will be: $P_t S_t$ We want exposure ...


3

for Japan, act/365 for the domestic market, and act/360 for the euroyen market. For swaps, fixed leg convention is 6m libor act/365, floating leg, if based on libor, is the 6m rate act/360, if tibor, then the 3m rate act/365.


3

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 component analysis to a currency basket of 9 pairs with a 2 month rolling window. In a second step, various techniques (logistic regression, decision trees, ...


3

Compounding the monthly excess returns won't provide the annual excess return. You need to compute the difference between the annual return of the portfolio and the annual return of the benchmark. To illustrate this let's look at an example. Consider the following two situations: The benchmark performs well with a $2\%$ return each month; The benchmark ...


3

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 concertation procedure". I don't easily find a description of the details (are they considering only traded prices, or bids and offers? How long of a time window ...


3

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 at spot rate: It costs 0.0133 pounds for the option to (sell 2/3 pound / buy 1 dollar). Done


3

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 payoff max(0, 1/FX - 0.01) Dollars = 0.01/FX * max(0,100 - FX) Dollars = 0.01 * max(0,100 - FX) Yen which is the same as a USDJPY 100 put on 0.01 dollars, as ...


3

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 call the three FX rates $x, y, z$ which satisfy the relation (or constraint) $z=xy$ and your product $P$, which is a function of $z$ only. You can interpret $P$ ...


3

$S(t)$ 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 options fixed strike prices would have to be divided by the CPI to be converted to real prices, thus requiring joint modeling of the stock real price and the CPI. ...


3

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's start with the uncovered interest rate parity: $(1+i_{domestic}) = \frac{E_t(S_{t+k})}{S_t} (1+i_{foreign})$ This formula basically says that two investment ...


3

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 compensate them for the additional risk. The RR is a spread position (long 25 delta call, short 25 delta put) with zero vega, the main exposure is skew. Because the ...


3

When in doubt, write down a diagram like this: AUDUSD: price of an AUD measured in USD = 0.68 Exchange Exchange Country Today Interest Rate in Future ---------- ----- ------------- --------- USA: 0.68 r_usd -----> 0.68*exp(r_usd*T) ...


2

2) you only take trading days for your analysis because taking in account days on which no price changes took place would shift results in a wrong direction. For exmple, you mostly take 250 trading days p.a. 3) Your time interval up to 2007 is okay and excludes the financial crisis, which is a non-normal circumstance. Therefore, your time interval can be ...


2

Amirsani, Here couple points how I would proceed: I would first look to divide your time series into different clusters, enough so that different market dynamics fall into different clusters. I guess you will not be trading a single asset and thus you will not just optimize over a single stock or options contract. I would strongly try to discourage from ...


2

You are not doing anything wrong. You just need to multiply the absolute return by the currency conversion factor. Example: You trade 200,000,000 yen notional and generate a return of 16% on that notional, then simply multiply 32,000,000 jpy gain by your conversion factor 0.0126 to yield a return of 403,200 USD. The return of 16% was generated on the ...


2

first of all, there is nothing wrong in a currency-only portfolio to be dollar long and short the cross currencies. If that is what your model predicts and if you have a high confidence in the predictions and standard error being low then why do you have issues being dollar long and short the other currencies? You can implement boundary conditions, such as a ...


2

A partial answer… For Black-Litterman, an equilibrium no arbitrage condition such as interest rate parity suggests investors would be indifferent between investing in either the foreign or domestic currency. Thus, you could use a constant zero return for all currencies in your opportunity set as the equilibrium model. What this ultimately would do is act ...


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