OlsenBlog

Price moves in the currency markets can be disruptive and lead to large losses with investors and corporations. In general, institutions do not protect themselves against this risk, because the cost of hedging is high. In this post, I try to explain how dynamic hedging improves the cost structure and makes hedging appear indispensable.

Currency risk is incurred, whenever assets or liabilities are denominated in a foreign currency.  Liabilities are the opposite of assets and can basically be hedged in the same way as assets. Assets, just as liabilities, can be of any shape or form; they can be financial instruments, fixed assets, such as a house or factory; or an income or payment stream, for example pension receipts or payments for project work. Whenever the foreign currency appreciates, the value of the respective asset increases, whenever the foreign currency drops, so does the value of the asset. (more…)

At Olsen, we have been researching financial markets for 25 years using tick-by-tick price data. We have developed a variety of information and risk management services and also have hands on experience from managing assets using quantitative models. Traders have repeatedly asked me, if I can give them recommendations on how to trade. In response to this, I will publish a number of blogs on the subject.

You have time

The most common mistake that a trader makes, is to rush into a position too quickly and to be too aggressive in his opening trade. There is no need to rush into a position and make a big trade, you have all the time in the world. Similar to the practice of serving slow food, I strongly recommend that you temper your natural impulse of trading at a high pace with large positions. (more…)

Investing in a portfolio of currencies is different from currency trading. The success of currency trading comes, obviously, from being on the right side—either long or short—of one transaction. In a certain sense this is like successful stock-picking: you commit to one position; you hope that the equity you choose will, sooner or later, be valued at a higher rate when you decide to sell it; you expect that if you time your sale correctly other investors will be willing to buy the security, even at its appreciated price.

Currency investing is different. Compared to investing in stocks or bonds, its time horizons are greatly compressed (meaning that the effects of trading volume plus liquidity plus the perceived value of a currency can present greater opportunities for gain and loss in one day that you might expect on conventional equity and fixed income markets in one year).

The equality of gains and losses: conventional investing is based on the notion of one-sided ownership: you buy (go long)…you hold…you sell. Currency markets, in contrast, place equal value on selling (going short); this is reflected in the very nature of every currency transaction because you must buy and sell a pair: you cannot take a one-sided position. As a practical matter, this means that opportunities exist regardless of whether “the market” is rising, falling, or moving sideways…

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The first shall be last, and the last first.
In the 1990s every large bank that wanted to be taken seriously placed a huge bet on their trading engines. But it was a long shot: they hired rocket scientists with the mandate to develop trading models based on neural networks, genetics algorithms and other magical tools that had paid off in the more respected disciplines of hard science…

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Abstract:

Standard risk metrics overlook or average away the impact of extreme events. To evelop and maintain viable investment strategies, Olsen expands the concept or risk-budgeting to allow for drawdowns and to forestall the suddenly fatal effects of margin requirements. This article promotes the combined application of the Calmar Ratio and a new metric devised by Olsen: ExposureFactor (the cost—in terms of leveraged risk capital—required to earn an average annualized return of 1%). The focus here is on strategic engineering of leverage to reduce risk and realize excess return. Included are critiques of some current risk metrics and an explanation of Olsen’s proprietary risk-reducing investment methodology…

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