What are FX Baskets & Indices?
VARIANSE currency baskets are groupings of FX pairs which are assigned individual
weightings depending on their influence on the basket category, to produce a basket
instrument which is priced and tracked like a conventional FX pair.
Uses include strategy building, with respect to correlation monitoring, identifying instances
of correlation decoupling that represent tactical trading opportunities, and testing of macroeconomic views of a certain country, region or collection of similarly characterised currencies.
The VARIANSE FX Trade Weighted Indices are based on major Central Bank's basket exchange rates which 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 Bank's preferred summary measure for capturing the medium-term effect of exchange rate changes on the economy and inflation.
We have calculated Trade Weighted Indices on the following Major Currencies on the right:
The VARIANSE Currency Commodity Index is designed to track the performance of three commodity currencies versus the US Dollar. The currencies in the basket are the following: Australian Dollar (AUD), New Zealand Dollar (NZD) & Canadian Dollar (CAD).
These developed economies depend on primary commodities for a significant share of their export earnings. As a result, the wild fluctuations of global commodity prices are likely to account for a large share of these countries' terms-of-trade shocks and have a critical influence on the value of their currencies.
Trading strategies involving currencies with high sensitivity to commodity prices can draw upon the index to test macroeconomic rationale, strength of historic correlations against the basket and instances of correlation decoupling to identify tactical market opportunities.
The VARIANSE Currency Volatility Index aims to provide a benchmark for currency market participants to represent investors' expectation of future volatility. The currency pairs chosen are the nine most liquid crosses as measured by the tri-annual BIS survey of 2004, with the weights corresponding to the average daily turnover in each cross.
The main advantage of tracking a currency volatility index as opposed to individual currency crosses is that an investor can avoid taking single currency risk, with the implied volatility on a particular cross typically dependent on the upcoming event horizon of a particular exchange rate and the economic cycle of a particular economy.
Additionally, one can use the index to:
> Take a directional view on volatility
> Express a view on risk-aversion & event risks