The impact of VXY and EM-VXY on the implied volatility of ATM option premiums for the USD/MXN exchange rate on the CBOE

Abstract

A series of econometric tests is proposed to study the impact of the VXY and EM-VXY indices on the implicit volatility of at-the-money options of the USD/MXN exchange rate and the premiums on their call and put options. The objective is to determine if these indicators can predict future changes in implied volatility and be used as entry or exit flags in investment and hedging strategies. Additionally, the volatility index (VIX), the USD/MXN exchange rate, and the Mexican Federal Treasury Certificates and London Interbank Offered Rate rates are included as complementary variables. Results show that although the EM-VXY, VIX, and the exchange rate are statistically significant for implicit volatility modeling, they do not have a predictive power that allows them to be used as entry or exit indicators. None of the variables are significant for modeling the premiums in call and put options. This research contributes to the filtering of instruments that, despite their design, may not contribute to the understanding of markets in emerging countries, such as Mexico. Future studies can extend this methodology to other exchange rates, trying different combinations of rates.