Correlations in the FOREX market: the risk and price

This is the second article on the correlation between the various instruments in the FOREX market. We have already discussed the correlation between the volatility in the market of foreign currency options and changes in the market spot price of the currency (see "Correlation in the FOREX market in number 35). In this article we examine the correlation between the spread of risk in the market of certain stock options and changes in currency spot rate of the currency.

What is that
• Facing the risk is to represent the expectations of the market in the direction of the exchange rate.
• Treated properly, Facing the risk may bring favorable signals perekuplennosti and pereprodannosti.

Turn the risk consists of a pair of options, the demand for and supply of the same currency. Facing the risk of have the same expiry date (eg 1 month), and sensitivity to the main spot exchange rate. They are quoted in units of difference in variability between these two options.

While in theory, these options should have the same implied volatility, in practice, this variability often differ on the market. A positive value indicates that the demand over supply and that the market expects upward movement on the currency. Similarly, a negative value indicates that the proposal took precedence over the demand and that the market expects the movement down the specified currency.

Facing the risk may be regarded as displaying a vote market. Positive value turn risk implies that market participants voting for the increase of currency were in the majority than those who voted for her decline. Thus, Facing the risk can be used as a tool for reconciliation of positions in the Forex market.

How it can be used to predict price movements?

Used properly, Facing the risk can be a valuable tool to assess the positioning of a certain currency. Although the signals given by the system of turn-risk will not be completely accurate, they will help determine when the market is a bovine, and when the bear.

Facing the risk of reporting the most valuable information when they are at relatively extreme values. These extreme values are usually defined as plus or minus the standard deviation of the average of positive and negative values.

Therefore, we look at the value of standard deviation below the mean of the negative spread of risk and value of standard deviations above the mean of the positive turn of risk.

When Facing the risk at these extreme values, they served the signals in the opposite direction - when the whole market spozitsionirovan at improving a particular currency, the currency will be much harder to rise further, but it is much easier to fall on negative news or events. The importance of a positive turn implies a risk situation perekuplennosti, while the importance of turning a negative situation involves risk pereprodannosti. Served signals are buying or selling are not perfect, but they can provide additional information that can be very helpful in making trading decisions.



For example GBP / USD: Facing the risk may apply to specific signals that are at extreme values: