Thomson Reuters launches new app on Eikon platform to allow real-time, multiple FX views.
FX volatility has risen considerably over the last year and according to experts, looks to remain elevated. And coupled with a cycle of dollar-strengthening that could also last for years, especially if central bank divergence continues (hawkish Fed and QE elsewhere) this means currency market accuracy will be as important as ever. More specifically, a good hedge program can keep analysts and investors satisfied provided there is transparency and a prudent plan in place.
Add to this the need for the tools that help companies do create that plan. Eikon, Thomson Reuters’ news, analytics and data visualization platform, is one such tool that traders are turning to. And the recent launch of its currency value tracker app should help when it comes to determining which currency structures “are potentially more cost effective given the shapes of interest rate and volatility curves.”
Thomson Reuters said the tracker allows users to monitor multiple value metrics across multiple currency pairs, for example to enable most appropriate choice of hedge instrument at any given time:
- Track spot, implied volatility, realized volatility, risk reversal skew, static carry, annualized net carry, spot price return, total return and various ratios
- Build currency baskets from dozens of pairs
- Evaluate historical data via heat maps, performance rankings and outlier plots
“Corporate treasurers typically have a range of instruments they can utilize to hedge currency exposure,” said Ron Leven, head of Eikon economic and foreign exchange content at Thomson Reuters, by email. “Relative cost is one consideration for which is the most appropriate structure at a given time. The currency tracker is designed to allow a hedger to get a quick picture of which types of structures, if any, are relatively cheap.”
Mr. Leven gives an example of how FX managers might use the currency tracker in the chart below in looking at euro/zloty (EURPLN), US dollar/rand (USDZAR) and euro/koruna (USDCZK) structures.
For EURPLN on the top line of the chart, implied volatility “is low on both metrics so options reflect good value and worth spending time to price up options,” Mr. Leven said. “The skew is not extreme so low-delta options and risk reversals probably not of interest. Carry is mid-range so duration of the hedge should be close to benchmark.”
In line two of the chart, USDZAR, volatility is very high “outright though not vs. realized,” Mr. Leven said. Therefore, options will be expensive “though worth considering if the user has strong preference for options. The skew is extreme for USD calls so low-delta options or risk reversals only a consideration if the user is a USD seller. Carry is high so keep duration of the hedge short vs the benchmark.”
Finally in the bottom line of the chart for USDCZK, volatility is closer to the low side, “especially vs realized,” so again, Mr. Leven said, “worth considering options. Skew extreme for USD calls. If user is a USD buyer low delta strikes and risk reversal not good value. Carry is very low so set hedge duration long vs. benchmark.”
FX managers can also determine cost effectiveness of a hedge using the currency value tracker. For this Mr. Leven said treasurers would “need to do simulations using the new tool to look at different hedge structures and what works best.” The tracker can then provide insight as to what the cheapest structure available is. In the grid below, the tracker identifies and translates the general extremes then shows the range of possibilities.