Seminar (Dept. of Finance)

Title: FX Option Volume

Speaker: Wang Tianyu, Associate Professor, School of Economics and Management, Tsinghua University

Time: 10:00-11:30, Mar.17, 2023(Friday)

Venue: Room 1007, Mingde Business Building

Language: English

ABSTRACT:

We study the information content of foreign exchange (FX) option volume by exploiting a unique dataset on over-the-counter FX options with counterparty identities and contract characteristics. We find that FX option volume can predict future exchange rate changes, particularly when the convenience yield of US treasuries is high.

These findings are consistent with an asymmetric information model in which informed traders trade either in FX option or spot markets. Supporting information-based arguments, we further document that the exchange rate predictability is stronger when using options with higher embedded leverage and around macro-announcement days.

Finally, we document that hedge funds and real money investors have superior skills in predicting future exchange rates compared to less sophisticated market participants.