FX Option Volume
56 Pages Posted: 23 Nov 2021
Date Written: November 18, 2021
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
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