Dan Barnes explains how targeted use of derivatives can create more efficient hedging for FX risk, and provide treasurers with an alternative to incurring overnight deposit charges
Despite ongoing concern around the US–China trade war, overall volatility in the foreign exchange (FX) space has declined over the past year. This pattern can be seen in Deutsche Bank’s Currency Volatility Index (CVIX) – the historical volatility index of the major G7 currencies (see Figure 1).
The CVIX has not gone past 9% since April 2019, helped by range-bound interest rates in the world’s major economies and low inflation, thereby reducing incentives to move money from one country to another.
Deutsche Bank’s CVIX provides a daily measure of volatility in the FX market, showing how suddenly volatility can spike and fall and providing a benchmark for currency market participants.
Low volatility is often correlated with tight spreads, lowering the cost of moving between currencies. Companies also often reduce hedging activity in periods of low volatility, as the risk of an adverse movement is reduced.
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