Currency indices by J. P. Morgan

Currency indices
By Peter Garnham
Copyright The Financial Times Limited 2006
Published: December 12 2006 02:00 | Last updated: December 12 2006 02:00


JPMorgan, the US investment bank, has launched two indices it hopes will become the benchmarks for tracking volatility in currencies in the same way that the CBOE Volatility Index, or Vix, does for equities.

The indices launched yesterday track currencies from the leading industrialised nations and from emerging market countries. The bank will offer investors access through forward contracts that will settle against a daily fixing level.

The VXY index measures volatility in a basket of G7 currencies and the EM-VXY tracks volatility in emerging market currencies. They will fill a gap in the market at a time of increased interest in investing in currencies as an asset class among a broader range of fund managers. They could also help form trading strategies.

"Even after last month's spike, currency volatility remains low by historical standards," said John Normand, global currency and fixed income strategist at JPMorgan. "Yet for all the focus on this issue, there is no benchmark for tracking aggregate volatility in currencies." The indices could also inform currency trading styles, such as carry trades.

Both indices are based on three-month at-the-money forward options, weighted by market turnover.

The weightings of different currencies within the indices are based on option turnover taken from the Bank for International Settlements' Triennial Central Bank Survey of the foreign exchange and derivatives markets.

JPMorgan said that the weightings were fixed and would not be adjusted in future, although this could change for EM currencies which have a greater likelihood of seeing significant changes in liquidity.