A network analysis of the structure and dynamics of FX derivatives markets

Abstract

This work leverages inter-connectivity patterns and dynamics of the FX Options and Non-Delivery Forwards (NDF) to uncover temporal changes in the structure and dynamics of these FX markets via network representations during the period between December 2018 to October 2020. We find considerable structural changes to the NDF market weeks before the volatility increase of financial indices such as VIX or VXEFA and the World Health Organisation pandemic declaration on 11th of March 2020. The NDF market shows evident structural changes, such as an increment in the diversity of operations and the strength of preferential attachment activity. In contrast, the OPT market shows significant changes in its dynamics rather than its structure. Comparing each market dynamics indicates an increased divergence in the specificity of trade operations and distribution of funds, reflecting each market’s contract flexibility. Lastly, this study finds that the network representations provide a simple and insightful understanding of the NDF and OPT markets, and provide a potential avenue for the development of methodologies that provide earlier warning signs of economic instability than traditional economic indicators.