FX Volatility Risk Premia

Similar to the equity volatility risk premia, implied volatilities extracted from option prices on major currency pairs have mostly been above comparable realized volatilities. This bias is known as volatility risk premium and can be explained by investor risk aversion leading to an excess demand for index put options. The strategy captures the spread between implied and realized volatility using futures, options and variance swaps on GBPUSD, USDJPY and EURUSD. This strategy exhibits substantial negative skew risk, which is managed using an intra-day deleveraging process.

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