Manfred Wiebogen President ACI The Financial Markets Association
Manfred Wiebogen President ACI The Financial Markets Association

Foreign Exchange and the Crisis

The foreign exchange market is arguably the most exciting market of all. Daily average turnover has increased by 210% during the period 2001and 2007 according to the latest BIS Annual Report. More importantly, Foreign Exchange has become a respected asset class in its own merits and given that it is typically non-correlated to other assets it provides good diversification.

Forex is also a dynamic market that has evolved and survived countless financial crises since the gold standard was abandoned in 1971 and in particular, is handling the current financial earthquake remarkably well. This is not to say that it is immune to the economic crisis. In fact, as with all other markets Forex has experienced an extensive increase in volatility as a consequence of the dislocations in other financial markets.With the transition in Europe of the single currency, both historical and implied volatility have declined during the past decade and remained persistently low until last year. Taking the Euro Dollar pair as an example, the one month implied volatility in the year 2000 averaged around 13%. As graphically illustrated below, in the subsequent years volatility has gradually declined to reach a bottom at just under 6% in 2007 and simply to shoot-up to around 12.5% in 2008.  Then if we had to look even closer, the same average one month implied volatility registered in the past six...continued

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