Trading foreign exchange triplets
We develop the optimal trading strategy for a foreign exchange (FX) broker who must liquidate a large position in an illiquid currency pair. To maximize revenues, the broker considers trading in a currency triplet which consists of the illiquid pair and two other liquid currency pairs. The liquid pa...
| Main Authors: | , , |
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| Format: | Journal article |
| Language: | English |
| Published: |
Society for Industrial and Applied Mathematics
2020
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| _version_ | 1797072245978300416 |
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| author | Cartea, A Jaimungal, S Jia, T |
| author_facet | Cartea, A Jaimungal, S Jia, T |
| author_sort | Cartea, A |
| collection | OXFORD |
| description | We develop the optimal trading strategy for a foreign exchange (FX) broker who must liquidate a large position in an illiquid currency pair. To maximize revenues, the broker considers
trading in a currency triplet which consists of the illiquid pair and two other liquid currency
pairs. The liquid pairs in the triplet are chosen so that one of the pairs is redundant. The
broker is risk-neutral and accounts for model ambiguity in the FX rates to make her strategy
robust to model misspecification. When the broker is ambiguity neutral (averse) the trading
strategy in each pair is independent (dependent) of the inventory in the other two pairs in the
triplet. We employ simulations to illustrate how the robust strategies perform. For a range
of ambiguity aversion parameters, we find the mean Profit and Loss (P&L) of the strategy
increases and the standard deviation of the P&L decreases as ambiguity aversion increases. |
| first_indexed | 2024-03-06T23:04:58Z |
| format | Journal article |
| id | oxford-uuid:6373ead0-853e-4b2c-9ea1-433d259ba850 |
| institution | University of Oxford |
| language | English |
| last_indexed | 2024-03-06T23:04:58Z |
| publishDate | 2020 |
| publisher | Society for Industrial and Applied Mathematics |
| record_format | dspace |
| spelling | oxford-uuid:6373ead0-853e-4b2c-9ea1-433d259ba8502022-03-26T18:13:11ZTrading foreign exchange tripletsJournal articlehttp://purl.org/coar/resource_type/c_dcae04bcuuid:6373ead0-853e-4b2c-9ea1-433d259ba850EnglishSymplectic ElementsSociety for Industrial and Applied Mathematics2020Cartea, AJaimungal, SJia, TWe develop the optimal trading strategy for a foreign exchange (FX) broker who must liquidate a large position in an illiquid currency pair. To maximize revenues, the broker considers trading in a currency triplet which consists of the illiquid pair and two other liquid currency pairs. The liquid pairs in the triplet are chosen so that one of the pairs is redundant. The broker is risk-neutral and accounts for model ambiguity in the FX rates to make her strategy robust to model misspecification. When the broker is ambiguity neutral (averse) the trading strategy in each pair is independent (dependent) of the inventory in the other two pairs in the triplet. We employ simulations to illustrate how the robust strategies perform. For a range of ambiguity aversion parameters, we find the mean Profit and Loss (P&L) of the strategy increases and the standard deviation of the P&L decreases as ambiguity aversion increases. |
| spellingShingle | Cartea, A Jaimungal, S Jia, T Trading foreign exchange triplets |
| title | Trading foreign exchange triplets |
| title_full | Trading foreign exchange triplets |
| title_fullStr | Trading foreign exchange triplets |
| title_full_unstemmed | Trading foreign exchange triplets |
| title_short | Trading foreign exchange triplets |
| title_sort | trading foreign exchange triplets |
| work_keys_str_mv | AT carteaa tradingforeignexchangetriplets AT jaimungals tradingforeignexchangetriplets AT jiat tradingforeignexchangetriplets |