Currency Spot Research Articles

Sovereign momentum currency returns

We study the relationship between cross-sectional sovereign credit risk and currency spot prices. We find that past (up to 12-month average) sovereign credit risk, measured by sovereign credit default swap (CDS) spreads, predict future currency spot returns. In particular, we document a significant cross-sectional currency portfolio spread in excess of the risk-free rate of return (up to 9.6% p.a.) between the highest and the lowest quintile sovereign CDS spreads. Overall, our results indicate that sovereign credit risk is systematically important for currency returns. Moreover, the level of sovereign credit risk has a persistent effect on currency returns which is consistent with a sovereign momentum effect.

The evolution of commodity market financialization: Implications for portfolio diversification

The financialization of commodity markets is a well-documented phenomenon spurred by the massive growth of institutional funds directed into commodity indices from the mid-2000s. More recent research suggests that a subsequent era of de-financialization has coincided with the retreat of institutional investors. This paper uses a latent factor model to examine the dynamic impact of commodity market financialization on spot currency, commodity and equity market linkages, focusing on countries with ‘commodity currencies’. The financialization period is characterized by increased interdependence of non-oil and oil commodity markets with each other and with other asset markets, implying reduced diversification potential. We find that commodity markets have become more highly interconnected with currency and equity markets of the large commodity exporters over the most recent sub-sample. We suggest that apparent de-financialization may be attributable to contagion effects from global crisis events, including the Great Recession and the European Debt Crisis of 2012.

FEASIBILITY OF SPOT CURRENCY TRADING UNIFIED WITH FIAT CURRENCIES AND ITS CHALLENGES - AN EDUCATIONAL PROCESS FOR STAKEHOLDERS

Cryptocurrencies refer to electronic money that is transferred digitally and unbackable in computers through a platform called the blockchain. In other words, virtual money is encrypted with electronic codes and they can thus register transactions; hence, all digital currencies, including bitcoin and wallet coins can be a means of payment to replace physical money for providing goods and services, and can be used instead of fiat currencies at the national and transnational levels. There are various advantages for this replacement, such as reducing the production of banknotes and metal coins, but this development in the structure of monetary payments leads to legal and political challenges, and it is necessary to address this issue in the present research. As an introduction, the equality of the fiat and spot currencies should be measured and the possibility of applying the effects of fiat currency to spot currency and its advantages and disadvantages should be also analyzed and explained. Obviously, analyzing this issue and generalizing the characteristics of physical to virtual money will be effective and pioneering for domestic and international trade, and identifying the challenges of unification can provide a suitable platform for adopting preventive measures in terms of eliminating and controlling possible risks. On this basis, the present research analyzed the topics through data collection and desk analysis.

Price Discovery of Currency Futures at NSE

The current study aimed to examine the causal relationship between the NSE currency future rates and currency spot rates in order to identify the price discovery mechanism at NSE market and its integration with foreign exchange market (spot market). To study the causal relationship between the said markets, we have considered daily closing rates for NSE currency futures and currency spot rates for selected pairs of currencies, i.e. USD/INR, GBP/INR, JPY/INR and EURO/INR. The data was obtained from www.nseindia.com and www.investing.com for the period from Jan-2010 to Sep-2017, which makes approximately 1750 observations for each currency pair in each market. It is found that the spot rate for JPY/INR leads the future rate. It is also identified that the spot rate for USD/INR does not cause the changes in futures. It indicates that the market integration between spot and futures at NSE for currency pair USD/INR is strong compared to other selected currency pairs. From the variance decomposition test we found that there is almost no impact of variance in USD/INR spot rate on future rate variance forecast errors. It implies that the causal relationship between for USD/INR spot and future rates is strong and mature compared to the measured causal relationships for the remaining currency pairs. This study concludes that the price discovery process for currency pair USD/INR is better at NSE currency futures among the selected currency pairs.

The effects of monetary shocks on inflation: High-frequency approach

Commonly used in monetary VARs identification schemes yield to a highfrequency approach as they tend to raise different empirical puzzles reported in the literature. However, financial markets in some open economies are not sufficiently liquid to provide minute bars data on interest rate financial instruments. This paper fills this gap employing a new series of high-frequency monetary policy surprises with USD/RUB currency futures and spot instruments. We find that a monetary tightening is contractionary without price puzzle and other paradoxes about financial variables. This result is robust for the period 2010—2019 apart from the crisis of 2014—2015 when the free floated ruble was devalued due to the sharp decline in oil prices. We also decompose surprises on monetary policy shocks — changes in the expected interest rate, and an information component — the information simultaneously conveyed by the central bank like an assessment of the economic outlook. We find that the former one significantly affects monetary policy surprises that does not confirm a hypothesis about substantial impact of non-monetary news on the external instrument.

Jumps in foreign exchange spot rates and the informational efficiency of currency forwards

AbstractIn this paper, we show that forward premiums are significant predictors of innovations in currency spot rates, and currency forward rates lead to price discovery during normal trading periods. Conversely, currency spot rates lead to price discovery during volatile periods. This finding is linked to investors' overreaction to information, which in turn induces jumps in the currency spot rate; positive jumps weaken the contribution of the forward rate to price discovery and their informational efficiency. We also find that the forward premium puzzle is linked to jump‐driven pricing inefficiencies.

Important Aspects Related To Foreign Exchange Operations Of Commercial Banks

This article provides analytical, critical and econometric analysis of the factors influencing the off-balance sheet operations of commercial banks of the Republic of Uzbekistan. Factors influencing documentary letters of credit, currency forward transactions, bank guarantee-related transactions, currency spot, currency futures and options from off-balance sheet operations, which are highly profitable for commercial banks, were studied.

Do forward premium rates predict the spot rates? Comparison of developed and emerging economies

AbstractThe study inquires the role of forward premium rates as a predictor for the respective currency spot rates. The data comprises of developing and developed 16 countries' currencies of daily spot rates and forward premium rates of 30, 90, 180 and 360 days by extending the work of Della Corte, Sarno and Tsiakas (2009). The study proposes the model of predictable time series in nature to test for the heteroscedasticity in respective categories of forward premium rates, for example, heteroscedastic forward premium model (H‐FPM). The results are encouraging and support that forward premiums have information that can be possibly utilized by investors for generating profits. Moreover, the predictive time series model observes that there exists a degree of concordance in results from in‐sample and out‐of‐sample (OOS_R2) statistical tests. The study finds that the (H‐FPM) dominates the symmetric‐mean model (S‐MM) and thus promises more profit incentivised benefits for investors. The study not only add knowledge to the previous study work in relation to predictability of the currencies spot rates through forward premium rates but also incorporate heteroscedasticity, endogeneity and persistency issues that lacks in past empirical studies.

Should we pay attention to investor attention in forex futures market?

ABSTRACT We investigate whether forex futures dynamics is responsive to change in investor attention. The currencies used in the study are the AUD (Australian Dollar), CAD (Canadian Dollar), EUR (Euro), GBP (Great Britain Pound) and JPY (Japanese Yen), all in terms of USD. The Google Search Volume Index (SVI) serves as the investor attention proxy. Our results determine the multiplicate relationships of forex futures return and trading volume with SVI (investor attention). Lagged SVI impacts current forex futures return and trading volume. However, there is no nonlinear relationship between forex futures and SVI. Financial contagion among forex futures has also been analysed through the channel of investor attention (SVI). There seems to be hardly any evidence that attention to other currency markets gives rise to the contagion effect. The findings of the study are barely affected by the inclusion of control variables such as currency spot rate and fundamental variables of uncertainty, suggesting that investor attention has an influencing role in the forex futures market.

Should central banks use the currency futures market to manage spot volatility? Evidence from India

The Reserve Bank of India has declared a policy of intervening in the retail currency futures market to manage volatility in the over-the-ounter (OTC) currency spot market, indicating its belief of underlying linkages between these two markets. This paper examines the dynamic interactions between volatility and volume across currency futures and spot markets in India. High-frequency five-minute level data for a year-long period are used to study the nonlinear symmetric and asymmetric causality (Kyrtsou–Labys, 2006) between volatility and volume within and across markets. The findings suggest that an increase (decrease) in volumes in either market causes a corresponding increase (decrease) in volatility in both markets. Specifically of interest is the observation that futures volume causes co-movement in spot market volatility. The study has implications for currency market participants, especially the Reserve Bank of India, in managing exchange rate volatility through the currency futures market.

Detecting and identifying arbitrage in the spot foreign exchange market

We propose a theoretical framework for the detection and identification of triangular arbitrage opportunities between currency exchange rates in the spot foreign exchange market. We obtain sufficient conditions for the exclusion of triangular arbitrage opportunities in the setting of non-trivial transaction costs in terms of the currency rates of the market under consideration. Then we propose an efficient computational approach which can detect triangular arbitrage opportunities in real time. Finally, we consider numerical studies that utilize spot currency exchange rate quotes to substantiate and present applications of the theoretical findings as well as to demonstrate the efficiency of the proposed computational arbitrage detection and identification methods.

Can skewness of the futures‐spot basis predict currency spot returns?

AbstractThis paper examines the relationship between skewness of the futures‐spot basis and expected currency spot returns. The empirical results show that the expected spot returns are negatively correlated with the basis skewness. We find that the basis skewness exhibits statistically significant in‐sample and out‐of‐sample forecasting power. Furthermore, the basis skewness beat the random walk (without drift) in economic measures. The impacts of the basis skewness on spot returns barely vary with time and have no structural breaks. We also find that the basis skewness can really improve the predictability of spot returns, even when the futures‐spot basis is considered.

The predictive performance of the currency futures basis for spot returns

This paper investigates the predictive performance of the futures basis in directly forecasting currency spot returns and compares it with that of the one-month forward basis. We consider the settle prices of both front-month and nearby-month continuous futures contracts and find that the futures basis exhibits statistically and economically significant in-sample and out-of-sample forecasting power, which clearly exceeds that of the well-known forward basis. The empirical results show that spot returns correspond negatively to both the front-month futures basis and nearby-month futures basis. Furthermore, the futures basis reveals substantial economic value for investors in terms of sizable and tangible portfolio gains, which are consistent with statistical measures. The difference in the forecasting ability of the futures basis and forward basis can be explained by the level of exposure to the time-varying risk premium. Finally, we find that impacts of the futures basis on spot returns vary with time and experienced substantial structural changes during the Global Financial Crisis.

Effect of a secondary market on a system with random demand and uncertain costs

In this paper, we consider inventory and pricing decisions for a system where the customer demand can be partitioned into two segments: a primary and a secondary market. These kinds of systems are observed, for instance, in technology intensive products or services where the primary market, being more loyal, is generally not too sensitive to the pricing of the product or service. While the primary market customer demand occurs right after the introduction of the product, the secondary market customer demand typically occurs after the product matures, and these customers are much more sensitive to changes in the sales price. The purchasing costs of technology intensive products very much depend on the spot currency exchange rate, and hence can be modelled as a stochastic process. Consequently, the sales price for the primary market customers can be assumed to be a mark-up of the spot purchasing cost of the product. On the other hand, as the secondary market customers are more sensitive to the sales price, a demand model, where the customer demand explicitly depends on the selling price would be more appropriate. We try to accomplish three objectives: (1) to model the described system, (2) to find the optimal initial quantity to stock, and (3) to determine the optimal sales price for the secondary market customers.

Detecting Arbitrage in the Foreign Exchange Market

In this paper, we propose a theoretical and computational framework for the detection and identification of (triangular) arbitrage opportunities among spot currency exchange rates in a foreign exchange market. We obtain sufficient conditions for excluding the triangular arbitrage opportunities in a market with or without market frictions, i.e. transaction costs. Then we propose a very efficient computational approach not only to detect triangular arbitrage opportunities in real time but also to identify the combinations of currencies that lead to the arbitrage opportunity from market data. In numerical studies, we utilize empirical data of foreign currency exchange rates to substantiate our theoretical findings and demonstrate the efficiency of the proposed computational approach.

An empirical analysis of corporate currency risk management policies and practices

Using a unique and extremely granular data set of complete currency spot and derivatives positions for 101 large non-financial corporations, we compare the stated currency risk management policies with the actual strategies executed by these companies. Our integrative analysis draws from the three principal sources of information that exist about firms: market prices, financial statements, and what firms say about themselves. We first identify a notable discord between the policies and their practices of firms. We next find that these companies engage in a high degree of currency speculation that seems to be driven by market movements with the results strongest for the heaviest derivatives users. Finally, we show that these companies attempt to time the market even when they are engaged in hedging. We find that the actions of companies differ from their words more often when they have a greater amount of debt, particularly foreign currency debt, and a lower level of managerial ownership. In general, we find that corporate risk management is highly speculative and more often than not disagrees with stated company policies.

International correlation risk

We show that the cross-sectional dispersion of conditional foreign exchange (FX) correlation is countercyclical and that currencies that perform badly (well) during periods of high dispersion yield high (low) average excess returns. We also find a negative cross-sectional association between average FX correlations and average option-implied FX correlation risk premiums. Our findings show that while investors in spot currency markets require a positive risk premium for exposure to high dispersion states, FX option prices are consistent with investors being compensated for the risk of low dispersion states. To address our empirical findings, we propose a no-arbitrage model that features unspanned FX correlation risk.

Price Discovery and Volatility Transmission in Currency Spot and Futures Markets in India: An Empirical Analysis

This article investigates the price discovery and volatility transmission between currency spot and futures markets in India. Daily closing currency spot and futures prices of United States dollar/Indian Rupee (USD/INR), Japanese Yen/Indian Rupee (JPY/INR), Great Britain Pound/Indian Rupee (GBP/INR) and Euro/Indian Rupee (EUR/INR) from 1 March 2010 to 20 January 2015 were used. Both long-and short-run relationship as well as volatility transmission was investigated by the use of Engle Granger co-integration test, error correction mechanism, causality test and the bivariate GARCH model. The co-integration results proved that there is a long-run relationship between currency spot and futures prices. The study finds that there is a unidirectional causal relationship from currency spot to futures prices of JPY/INR, GBP/INR and EUR/INR. Further, results conclude the bidirectional causal relationship between USD/INR currency spot and futures prices. The result further shows that the spot market adjusts to new information faster than futures market suggesting that spot price leads the futures price and contributes largely to price discovery. Finally, the results show that there is unidirectional volatility transmission from currency spot to futures prices of JPY/INR, GBP/INR and EUR/INR and bidirectional spillover between currency spot and futures prices of USD/INR. Based on the findings, relevant policy recommendations are made.

Effectiveness of Currency Futures Market in India: An Empirical Investigation

This article investigates the role of currency futures market in India in the context of high volatility of Indian rupee (INR) in recent years. It examines whether the spot volatility before and after the introduction of currency futures were significantly different. It also examines the volatility causation between currency spot and futures market in India. The study considers three international currencies, namely US dollar (USD), British pound (GBP) and Euro in relation to INR for the period of 2006–2013. It made use of GARCH model framework and Granger causality test. The GARCH model results indicate that after the introduction of futures, there is less volatility for GBP and Euro but not in the case of USD. The Granger causality test reveals that USD and Euro has unidirectional causality, which means that spot causes future fluctuations, while in the case of GBP, there is bidirectional causality. The study concludes that the introduction of futures is not effective in reducing spot volatility for INR–USD but there is a marginal effect for INR–GBP and INR–Euro.

Correlation asymmetry and implication on hedging

The paper studies the correlation asymmetry between currency spot and futures returns and its implication on hedging effectiveness using alternative multivariate GARCH models and different hedging strategies. For this purpose, daily data of EUR spot and futures returns are used to present a direct hedging strategy. A cross hedging strategy is also proposed using TND spot and EUR futures returns. Dynamic hedging is implemented using five multivariate GARCH models. The diagonal VECH and BEKK models are chosen among the covariance models. The CC-GARCH, DCC and GDCC represent the correlation models. The empirical results show that correlation between EUR spot and futures returns as well as between TND spot and EUR futures returns exhibit asymmetric behaviour. Moreover, the asymmetric diagonal VECH gives the best performance in terms of portfolio risk reduction in both strategies showing that covariance models are better than correlation models in modelling correlation asymmetry.