This study investigates an efficient parametric portfolio policy model to improve the return distribution of the well-known currency carry trade investment strategy. This carry trade strategy invests into high-yielding currencies that are subsequently funded by low-yielding currencies. Following...

In this paper we derive the measure of position-unwinding risk of currency carry trade portfolios from the currency option pricing model. The position-unwinding likelihood indicator is in nature driven by interest rate differential and currency volatility, and highly correlated with global...

The use of futures exchange contracts instead of forwards completes the maturity spectrum of the correlation between the spot yield and the premium. We find that the forward premium puzzle (FFP) depends significantly on the maturity horizon of the futures contract and the choice of sampling...

This note draws an analogy between deviations from no-arbitrage forward-spot relationships in currency and in commodity markets. The key is to notice that the U.S. dollar acts as a commodity in foreign exchange (FX) markets. In the physical commodity space, if the spot price is too high relative...

I link deviations from forward-spot parity for currencies and commodities. The key is to think of the U.S. dollar as a “commodity.” When commodity spot prices are too high compared to futures, arbitrageurs will short the commodity and bank dollars. When physical scarcity constrains commodity...

This paper provides empirical evidence that volatility markets are integrated through the time-varying term structure of variance risk premia. These risk premia predict the returns from selling volatility for different horizons, maturities, and products, including variance swaps, straddles, and...

This paper constructs risk-free interest rates implicit in index option prices for ten of the major G11 currencies. We compare these rates to the yields of government bonds to provide international estimates of the convenience yield earned by safe assets. Average convenience yields across...

We use futures instead of forward rates to study the complete maturity spectrum of the forward premium puzzle from two days to six months. At short maturities the slope coefficient is positive, but these turn negative as the maturity increases to the monthly level. Futures data allow us to...

In this paper we explore the dynamics of Implied Volatility Surfaces (IVS) both in a single-currency framework, and in the context of a global, integrated market. We construct a parametric function of “moneyness” and “time-to-maturity” factors that correspond to common shapes of IVS with...

We use futures instead of forward rates to study the complete maturity spectrum of the forward premium puzzle from two days to six months. At short maturities the slope coefficient is positive, but these turn negative as the maturity increases to the monthly level. Futures data allow us to...