The VARIANSE Trade Weighted Indices are based on Major Central Banks' basket exchange rates
They track the performance of a currency against a defined basket of currencies .
Each basket is limited to the currencies with the largest weights in the relevant central
banks officially published index. The respective weights are scaled up to 100%.
TWI's are a measure of the value of the currency relative to the currencies of the country's major trading partners.
The Index is the Central Banks' preferred summary measure for capturing the medium-term effect of exchange rate changes on the economy and inflation.
By utilising currency indices, traders no longer simply have the option of tracking single currency pairs - they can objectify, and analyse a specific macro-economic view.
The added benefit being that the underlying indices are less volatile than individual cross rates.
How is the FX Index Calculated?
Now for the maths...
1. First we calculate the Geometric Mean (GM) of the Basket
where:
N = Number of components
Pair N = Market price of Nth Pair
2. Then we multiply the value A by the constant factor*
*A constant factor is used to turn the basket into an
index which sets the value of the basket to usually
equal 1 or 100 at a pre-determined date in the past,
this allows for easier tracking and simpler pricing.
