Volatility And Skewnesstransaction In The Foreign Exchange Narket

Increasing foreign exchange fluctuation has become one of the salient features of the global financial crisis. Besides introducing the traditional volatility trading derivatives, the paper explored the possibility of developing a skewness swap product to get profit from biased estimation of volatility. By studying the exchange rates and option implied volatilities of three major currencies USD, EUR, GBP and two sub-major currencies JPY and CHF from 1999 to the first half of 2013, we overturned the forward implied volatility assumption and found that biased estimation depended on the underlying skewness. We also discussed the reason why simple skewness swap did not apply in the foreign exchange market...