Standard Curry trade - is a popular currency speculation, which involves investing in currencies with high interest rates by borrowing in currencies with low. This strategy works well if, for example, spot rates of exchange rates are unpredictable. In recent years, investors could exploit not only the value of currencies, but also their level of volatility. This was made possible through trade contacts, called "forward agreement on Volatility» (forward volatility agreement, FVA), which, in fact, allow investors to trade volatility. Technically speaking, FVA - a forward contract on the future level of volatility, which is one dollar of investment provides the difference between the future spot and forward implied volatility of implied volatility.The essence of FVA in that it allows investors to speculate on the level of future volatility. Thus, Kerry trade volatility "- a speculative strategy, which buys and sells FVA, where investors are trying to make money by guessing the level of future levels of implied volatility. Can also be attributed to the standard curry trade; curry trade in volatility works well if the spot implied volatility is unpredictable. Then the investors participating in this new curry trade will be on average earn on the difference between spot and implied volatility, without worrying about changing the exchange rate.
The relationship between spot and forward volatility is virtually absent, which implies the conclusion that the volatility of the spot can only be a random price changes. This is a serious result has important implications.
Are profitable speculation on volatility? If the forward volatility signals a weak spot of the future implied volatility, buying and selling FVA can be very profitable. Another important conclusion is that the yield on the standard curry trade in currencies and the carry trade with volatility, as a rule, is not correlated with time. This can be seen on the graph, which shows the annual non-standard Sharpe ratio for the standard currency trades curry (CTC) and the curry trades volatility (CTV).
Sharpe ratio defined simply as the difference between the yield of each strategy per unit of risk. CTV strategy tends to generate more revenue at the beginning and end of the schedule, and CTC performs much better in the middle period. Moreover, it will be interesting to note that over the past two years in this example, the Sharpe ratio strategy grows CTV, while CTC is falling. This means that CTV strategy have proved effective during the recent credit crisis, and the CTC - no.
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