Bank of England stumbles over FX trading gold mine

Bank of England stumbles over FX trading gold mine

Last week, Bank of England researchers published a blog outlining a new study into the predictability of exchange rates. They stumbled over a simple strategy that appears to churn out results that would be the envy of any hedge fund trader.

It’s simple: buy currencies against the dollar which attract little interest in options markets, and sell those with high volumes of options trading. We’re not sure if the UK central bank will chuck in its day-to-day role to turn into a prop trading shop, but the study’s results were intriguing.

The Sharpe ratio is a measure of risk-adjusted returns (using volatility as a proxy for risk), and a ratio that high surpasses most hedge funds. These folks might now be busy fielding calls from the Mayfair crowd because:

Whilst casually nailing a lucrative new trading strategy the Bank of England staff also had a rare word of praise for hedge funds, who it said were the best in predicting exchange rates alongside their boring old buddies in “real money”, ie more traditional investors. (Since they actually own the money that moves markets, the guys in real money probably don’t deserve the same praise.). 

This means at least two things: those who pay 2/20