FX Option Volume

56 Pages Posted: 23 Nov 2021

See all articles by Robert Czech

Robert Czech

Bank of England

Pasquale Della Corte

Imperial College Business School; Centre for Economic Policy Research (CEPR)

Shiyang Huang

The University of Hong Kong - Faculty of Business and Economics

Tianyu Wang

Tsinghua University, School of Economics and Management

Date Written: November 18, 2021

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 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 are better informed than other groups of investors in predicting future exchange rates.

Keywords: Currency Return, Foreign Exchange Option, Informed Trading, Dollar Demand

JEL Classification: F31, G12, G14, G15

Suggested Citation

Czech, Robert and Della Corte, Pasquale and Huang, Shiyang and Wang, Tianyu, FX Option Volume (November 18, 2021). Available at SSRN: https://ssrn.com/abstract=3969000 or http://dx.doi.org/10.2139/ssrn.3969000

Robert Czech

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

HOME PAGE: http://https://www.bankofengland.co.uk/research/researchers/robert-czech

Pasquale Della Corte

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London, SW7 2AZ
United Kingdom
+44(0)20 759 49331 (Phone)

HOME PAGE: http://sites.google.com/view/pasqualedellacorte

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Shiyang Huang

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Tianyu Wang (Contact Author)

Tsinghua University, School of Economics and Management ( email )

Shuangqing Road 30
Haidian District
Beijing, Beijing 100084
China

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