From the April 01, 2012 issue of Futures Magazine • Subscribe!

Building forex volatility strategies

imageEconomic problems, particularly those in Europe, have increased the public’s awareness of how fragile the relationships are between different currencies, and how difficult it may be to keep an international currency such as the euro afloat. With its institutional limitations, the European Central Bank is not able to act with the full force of a central bank characterized by the U.S. Federal Reserve — buying and selling government securities and providing liquidity to member banks as a lender of last resort.

Although the problems the euro faces seem severe, it is not at the top of the list in terms of implied volatility. “Forex option price curves” (below) shows that the options market on Nov. 4, 2011 put the March 2012 euro calls in second place following the Swiss franc, and slightly higher than the Japanese yen. The Swiss franc may have been temporarily in the top position because of its relatively steep 11.3% decline from Sept. 2 to Nov. 4. Higher price curves indicate predicted larger price spread variations between Nov. 4 and expiration in March.

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