spot fx is great. You can create your own options a heck of a lot cheaper in spot than you can on CME. A true black swan would be a breakup of the EU, but with spot, you can exactly tailor your exposure. I always have a couple of positions with no stop that I have computed I can survive if they go down to zero or up to infinity. Very easy to write your own custom tailored insurance policy in spot fx.
mav, how is the eu itself a peg? Does this mean that I should stay away from the eur pairs too? What is left?
Hello Maverick74: Thanks for the reply, but I am not sure why you say it would have worked out and then say all pegs eventually fail. It seems that the fixed exchange rate system was a bad idea from the beginning. How would the peg have worked and not eventually fail ? The impossible trinity, or “trilemma” described in the saxomarkets article would be an argument for not having a fixed exchange rate for any one, not just the Swiss It also seems to me that the central banks favoring a fixed rate system over the isolationist route so they go through the economic shocks together is puzzling. Who really knows what the ideal exchange rate is and even if the fixed exchange rate was the ideal rate at one time making a rate fixed just means that it is now a form of price control which means prices can't move freely, but market pressures will eventually build up and cause the peg to fail in one big economic shock as happened with the Swiss franc and the British pound with Soros. In other words trying to use fixed exchange rates as a means to ensure economic prosperity sounds like a fool's errand. I do appreciate your taking the time to answer my questions and hopefully I am not coming across as critical of you. I just find the topic very interesting and you are very knowledgeable on this subject.
When I saw worked out, I'm referring to the short term policy. Long term, all pegs fail. Short term it could have worked had the Euro Zone not been such a clusterf*ck. Hope that clarifies.
Hello Maverick74: Yes it does, thanks. So what were the short term benefits that the Swiss hoped to achieve ?
lol, if you consider a 40% move in a major (G8) currency imaginable then I am not sure what still shocks you. I think what is unimaginable is that this incident did not bring about many more casualties. Maybe we have only seen the tip of the iceberg so far... And look at all the post adjustments and market reactions after pegs or semi-pegs were given up on, you will hardly find a 40% move in a currency, especially not a safe-heaven currency which implies generally sufficient liquidity to escape a >20% move. So, with all respect I disagree, this was a black swan event but I do not care about definitions, it was a x-sigma SD event, no question.
My summarized assessment is this: Let's not get all worked up over this incident. The writing was on the wall and most in the market have actually abstained from taking exposure to Swiss Francs for months now. In the end it was an anomaly and huge outlier but one that exposure to could have been avoided. My algorithmic trading system did take 10:1 risks at times, even in single positions, but I also take a lot of precautions, such as not taking exposure around important economic news event, if scheduled but one-time events loom then I manually override the system and block specific asset classes or symbols from being traded. I will continue running the same risk metrics that have worked for me for a long time. It all comes down to prudent risk management, and even 10:1 or possibly a little more can be considered prudent at times. Let me ask you a question: If the chance of scoring a 100% account balance return in a single position offered itself to you that came with a risk of complete account blowup at 1% would you take that trade? Some may say no, but the same may take it if it came at 0.01%. I hope you see my point. Wisely managed risk is what should be sought and that means to always think in terms of risk-adjusted returns.
Hello volpunter: If you're account can be replenished readily as in you're day job can recover the losses readily, then sure may be just one time. If you couldn't recover your account readily or even in your life time then of course not. As you say it is best think in terms of risk-adjusted returns.
I never "replenished my account" in my life time. And I do not have a day job other than my trading career (I would not even know what else to do, I never learned anything else and I would not have a bit of passion for anything else, work wise). I am a career trader having worked for more than a decade at banks and hedge funds and now manage my life savings. Let's again not forget that this situation was "home brewed". While I have compassion for those who lost I do not forget that the writing was on the fall in CHF. I have prevented my system from taking CHF related positions since the day the peg was setup on Sept 6, 2011. And I squared my discretionary positions in the end of December and have not touched the pair since. Please keep in mind that liquidity in any CHF related pair during the lifetime of the peg was incredibly low. EURUSD would never ever suffer a 20% short-term move even if you nuked all of Europe. Please note that when I say short-term I am talking literally about seconds-minutes where nobody quotes prices and nobody can square positions. This is exactly what happened all the way down to eurchf 1.05 levels and below. I have seen some trades settle in the 1.00-1.05 range but there are many people who could not get out either because their platform froze or due to other event risk that perfectly played out at that time. I stand by my claim that trading currencies with 10:1 leverage is completely manageable, subject to precautions and sound position management.
The event was the SNB pulling the plug. The consequences of that event were the huge moves in the market. The main piece in the puzzle was the SNB and their action was certainly imaginable given the ECB's expected change in stance. If the market moves were half the size or twice the size the predictability of the event would have been the same ... far from unimaginable. Whenever world events cause HK to pull its plug there will be those that will talk about the Black Swan event yet there will be circumstances present that will make it quite imaginable. My cousin resigned from the board of a major financial institution in 2007 many months before the Bear Sterns collapse. I asked him why a few days later. His response was as simple as you get. "We were lending money to people who couldn't pay it back. That is not a business I want to be in." To him 2008 was not a Black Swan event but a predictable consequence of a horrid business model that had infected the underpinnings of the world's financial structure. It was his resignation that encouraged me to short a number of investment banks with Lehman ending up as my most profitable play. The reason this latest incident did not bring about many more casualties -- although a few more small firms having problems would not surprise me -- is that it was not only imaginable but imagined!