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It is no surprise to anyone that the FX markets are dead right now... We are glad when the EUR moves 50 points these days. Gone are the days of the 300-500 point daily swings of 2011 - at least for the foreseeable future anyway. In a year such as this one so far, it is beyond critical to adapt our horizons in a realistic way.
This year has been so against consensus it is crazy. Going into the year, everyone was expecting the USDJPY to rally towards 110, the Nikkei to hugely outperform and Global rates to be rising, and fast. Yet none of these have happened. USDJPY is 4% lower, the Nikkei is a huge -11.15% down (in USD terms) and US 10's are 40bps lower. So it is fair to say that this year has been a tough one, one of the toughest in terms of alpha generation since 2008 in my opinion.
Here is JPM's FX volatility index.
As we can see it is very low, and still heading lower, and given the lack of any huge events its not a surprise.
In a previous article here I discussed how to use Volatility to aid in trading, and this article, while similar will focus on how we need to adapt to low vol environments, giving a few tips I've learnt from my times trading both high and low vol per…
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Daytrader21 avatar

mimuspolyglottos you're right the FX volatility is just dead, when you're used to 2009-2011 kind of volatility environment this market is a big pain:). AdrianWS  eurchf market has been distorted by the SNB cap so it make sense for the IV to drop sharply. When it comes to FX correlation when one broke it tends to trigger a domino effect.

AdrianWS avatar
AdrianWS 21 Apr.

Daytrader21 of course its skewed, and that's why I used it in my example because it was a large number (~3) when considering other pairs, the relative Implied vol could be 1.2x or 1.5x and it would have been a weaker example. But the theory remains correct underneath and this is how one risk-adjusts trades in a cross-asset enviroment. and @mimuspolyglottos what you say is perfectly true, couldn't put it better myself :)

luke1973 avatar
luke1973 24 Apr.

To me in Low Vol Environment you better sit on your hands  and do nothing money is made when there is volatility.That is story

Airmike avatar
Airmike 24 Apr.

very nice article as always :)

Elani avatar
Elani 29 Apr.

Good written article!

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After discussion in a recent webinar on the price action of the GBPUSD we stumbled across a huge aspect of the market that is barely touched upon (or even known) about from a retail perspective. That is Delta and gamma hedging in the spot FX market. Firstly we need to define these, and in the least mathematical way (to keep it simple)
Delta - the change in value of the derivative compared to the change in price of the underlying asset. Delta can be expressed in a few ways, but in the FX markets it will normally be represented as a % of the notional position. For example, if I have an option position in EURUSD worth €1,000,000 and a delta of 25% then my option increases or decreases in value at 25% of what the EURUSD moves. I.e. If the EURUSD rises 1%, then my option rises by 0.25% etc
Gamma - this is the second derivative, so this is the change of delta for a change in the underlying. Delta is not constant, and as the EURUSD rises the delta changes (this relationship is defined by gamma). Once again quoted in %. For example the same option above with a delta of 25% (€1,000,000 value) might have a gamma of 10%. This means that for a 1% change in the EURUSD the delta changes by 10%. …
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P3tr4 avatar
P3tr4 19 Feb.

well done. Solid article

mimuspolyglottos avatar

This is N. Taleb's "Dynamic Hedging" in 1:100 scale with effortless reading. Trading FX from spot trading perspective is very much like sitting on iceberg without much and proper information what is beneath waterline, and You are trying to uncover this "underworld" for us. Thank You so much. Valued.

jezz avatar
jezz 20 Feb.

This month we have some hidden treasures of Forex introduced. Hedging strategies are my cup of tea, yet I still have a lot to learn

scramble avatar
scramble 27 Feb.

well exposed concept! well done! :)

AdrianWS avatar
AdrianWS 27 Feb.

Cheers everyone! Am just trying to drill home the idea that FX options are far more important than they may originally seem.


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