From the Inside Flap
Praise for FX Option Performance
'The authors have for the first time uncovered what actually happens to foreign exchange options once they are bought or sold - and it can be unexpected. Any students taking a course on derivatives trading or valuation should include this in their reading, and investors or corporations will find valuable information here for their trading and hedging strategies. Highly readable, with figures and data to back up every statement, it is a useful addition to any financial collection.'
--Piotr Karasinski, Senior Advisor at the European Bank for Reconstruction and Development
'This new book on FX Options Performance presents valuable insights into which FX vanilla options and their trading strategies would have been worth their money. The authors have conducted a gigantic historic data analysis with spot, rates and smile data ranging back to the origins of the FX options market across several currency pairs and I am pleased to see that they have made their research results available in this book. Both investors and hedgers will benefit from knowing which FX option based strategies would have worked in the past and understand how an options based carry trade tends to influence the performance.'
--Uwe Wystup, Managing Director, MathFinance AG, Germany
'This book is written by some of the world's leading experts on FX options. Anyone who regularly trades FX options will find it full of useful and immediately applicable material.'
--John Hull, Maple Financial Professor of Derivatives and Risk Management, Joseph L. Rotman School of Business, University of Toronto
'I commend the authors for their careful study of the difference between the price of an FX option and its average payoff. As such, their study is of immense interest to both practitioners and academics alike.'
--Peter Carr, PhD, Global Head of Market Modeling at Morgan Stanley, Executive Director of NYU Courant Masters In Math Finance
'This book is superb and clearly reflects the authors' mastery of the subject. The exposition is comprehensive, covering contributions from all corners of the subject, from the history and the basics of FX option trading all the way through the latest research in the area. There is no excess verbiage or mathematics: everything is there for a reason. This book defines our state of knowledge on FX options.'
--Lucio Sarno, Professor of Finance, Cass Business School, City University London, Research Fellow, Centre for Economic Policy Research
'Jessica James is a story teller. She and her co-authors have written about foreign exchange options like a best-selling thriller, with a unique combination of a superb literary style, comprehensive practical experience and deep intellectual understanding of what actually happens in financial markets. Read this little gem of a book not only to find out why these instruments are persistently mis-valued, but also to appreciate the authors' gifted writing.'
--Carol Alexander, Professor of Finance at the University of Sussex, Co-Editor-in-Chief of the Journal of Banking and Finance
'This book describes the findings of path-breaking empirical research into the actual market worth of Foreign Exchange options and forwards. These findings on cost effective hedging of FX exposures are all the more remarkable in that their authors' long standing senior experience in leading financial institutions advising institutional clients has been applied to previously open questions critical for investors, rather than for banks, as is nowadays commonly held.'
--Professor M.A.H. Dempster, Centre for Financial Research, Statistical Laboratory, University of Cambridge and Cambridge Systems Associates Limited
From the Back Cover
The FX Option market has grown from humble beginnings in the 1980s to a global behemoth, with hundreds of billions of US dollars worth of flow going through it each trading day. With such size and liquidity, it is generally assumed to be efficient, with few profit opportunities. But astonishingly, this is not so. The authors have taken a completely different attitude to most option studies; instead of looking into the theory of how the products are valued and what they should be worth, they have gone back through the historical data to find out what they actually delivered compared to what they cost.
FX Option Performance thus offers a unique and practical guide to option trading and hedging. Written by Jessica James, Jonathan Fullwood and Peter Billington - who among them combine academic rigour with decades of option trading experience - this essential resource has the courage to report how much these contracts have really made or lost. This critical (and often overlooked) information gives investors and hedgers alike the edge they need to make more informed decisions. Written in accessible terms and not overly technical, with over a hundred charts and diagrams to illustrate their findings, this book should appeal to anyone with an interest in the area. The authors reveal where to look for value and offer help to corporations hedging their FX exposures.
The results of their studies are presented in extensive and detailed tables, designed so that investors or corporates who have a question on a particular currency pair or type of option can quickly find out what, on average, they have made or lost throughout history. Some of the results they find are truly remarkable, and presented here for the first time. For example, investors who would like to protect against the depreciation of the Brazilian Real would have found FX options to be far cheaper than the apparently simpler forward contracts which are usually assumed to be good value. The options were one third of the cost. Another remarkable discovery is that that longer dated call options pay back on average only about half of their initial cost. It seems astonishing that this information has never before been published.
That it has not is a reflection on the mammoth task that the authors undertook when they decided to value options on every currency pair whose data was publicly available, throughout every historical period for which there was good data. Drawing on practical experience of the different data types and valuation methods in the various markets, together with a robust statistical approach, their detailed studies present these results for the first time.
FX Option Performance will be a fascinating read for students entering the field, a source of exciting ideas for investors looking for opportunities, and an essential guide for corporations wondering how to hedge their FX exposures.
