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FX option volume

Author

Listed:
  • Czech, Robert

    (Bank of England)

  • Della Corte, Pasquale

    (Imperial College London and Centre for Economic Policy Research (CEPR))

  • Huang, Shiyang

    (University of Hong Kong)

  • Wang, Tianyu

    (Bank of England)

Abstract

We study the information content of foreign exchange (FX) option volume using a unique dataset on over-the-counter FX options with disclosed counterparty identities and contract characteristics. Our study shows that FX option volume can predict future exchange rate returns, especially when the demand for the US dollar is high. In support of information-based arguments, we also document that the exchange rate predictability is stronger around macro-announcement days or when using options with higher embedded leverage. Finally, we show that hedge funds and real money investors have superior skills in predicting future exchange rates compared to other investor types.

Suggested Citation

  • Czech, Robert & Della Corte, Pasquale & Huang, Shiyang & Wang, Tianyu, 2022. "FX option volume," Bank of England working papers 964, Bank of England.
    • Handle: RePEc:boe:boeewp:0964
    as

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    References listed on IDEAS

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    Cited by:

    1. Bahaj, Saleem & Czech, Robert & Ding, Sitong & Reis, Ricardo, 2023. "The market for inflation risk," Bank of England working papers 1028, Bank of England.

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    More about this item

    Keywords

    Currency return; foreign exchange option; Informed trading; dollar demand;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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