Literature Review

1. Method and system for delivering foreign exchange risk management advisory
solutions to a designated market, Dec 2001
Authors: Lois Scheirer
In this paper they suggest a Consistent with principles of the present invention,
a method and system for delivering foreign exchange risk management advisory
solutions to a designated marked is disclosed. For each user, the disclosed system
generates an exposure model that is consistent with that user's risk management
policy and a budget/pricing determination made in response to user information and
external pricing information. The disclosed system may further operate to determine
an appropriate measurement of risk and associated hedge alternative for a user,
consistent with economic forecasts, and process a request for a hedge instrument from
the user. Various hedge instruments may be analyzed and/or obtained through the
disclosed system, including spot contracts, forward contracts, option contracts, and
money market instruments. The disclosed system further provides extensive training,
compliance and sales related features.
2. Dependence structure between the equity market and the foreign exchange
marketA copula approach, Sept 2010.
Authors: Cathy Ning
In this paper they suggest that the dependence structure between the equity
market and the foreign exchange market by using copulas. In particular, several
copulas with different dependence structure are compared and used to directly model
the underlying dependence structure. We find that there exists significant symmetric
upper and lower tail dependence between the two financial markets, and the
dependence remains significant but weaker after the launch of the euro. Our findings
have important implications for both global investment risk management and
international asset pricing by taking into account joint tail risk.

3. Inflation Effect of Foreign Exchange Reserve Increase and the Effectiveness of

Monetary Sterilization Policy
Authors: Fang Xianming Pei Ping Zhang Yihao
In this paper they suggest to discover the inflation effect of foreign exchange
reserve increase and the effectiveness of monetary sterilization policy in China. Based
on the quantitative monetary theory and China's reality, by using relevant literatures
for reference, the paper establishes a special theory model by modifying and
developing the model of Kumhof (2004). The empirical testing through China's
seasonal data during the period of 2001-2005 shows that the increase of foreign
exchange reserve results in an obvious inflation effect, and the monetary sterilization
policy of the central bank is effective on the whole, but the elasticity of monetary
sterilization policy is not good enough. Finally, some implications are drawn from the
test result.
4. System and method for generating and executing insurance policies for foreign
exchange losses, Oct 2000
Authors: Jay S. Walker, James A. Jorasch
In this paper they suggest a system and method for providing a foreign
exchange insurance policy that automatically considers factors such as the type of
currency, exchange rate, amount of coverage, and period of coverage, to determine a
premium. Users can access the system using credit cards, ATMs, banks or other
media.
5. Rise of the Machines: Algorithmic Trading in the Foreign Exchange Market,
Sept 2014
Authors: Alain P. Chaboud, Benjamin Chiquoine, Erik Hjalmarsson And Clara
Vega
In this paper they suggest the impact of algorithmic trading (AT) in the foreign
exchange market using a long time series of high-frequency data that identify
computer-generated trading activity. We find that AT causes an improvement in two
measures of price efficiency: the frequency of triangular arbitrage opportunities and

the autocorrelation of high-frequency returns. We show that the reduction in arbitrage

opportunities is associated primarily with computers taking liquidity. This result is
consistent with the view that AT improves informational efficiency by speeding up
price discovery, but that it may also impose higher adverse selection costs on slower
traders. In contrast, the reduction in the autocorrelation of returns owes more to the
algorithmic provision of liquidity. We also find evidence consistent with the strategies
of algorithmic traders being highly correlated. This correlation, however, does not
appear to cause a degradation in market quality, at least not on average.
6. Foreign exchange exposure of domestic corporations, Dec 2010.
Authors: Raj Aggarwala, 1, Joel T. Harperb
In this paper they suggest a foreign exchange risk that have focused on
multinational companies, this paper documents that domestic companies face
significant foreign exchange exposure. Indeed, we document that on average domestic
company foreign exchange exposure is not significantly different from the exposures
faced by multinational firms. As expected, the number of domestic firms with
significant foreign exchange exposure increases with the exposure estimation horizon.
More interestingly, the level of domestic firm exposure is significantly negatively
related to firm size and asset turnover, and positively related to the market to book
ratio and financial leverage. Our results have important implications for managers,
policy makers, and accounting standards.
7. Combining mean reversion and momentum trading strategies in foreign
exchange markets, Nov 2010.
Authors: Alina F. Serban.
In this paper they suggest the literature on equity markets documents the
existence of mean reversion and momentum phenomena. Researchers in foreign
exchange markets find that foreign exchange rates also display behaviors akin to
momentum and mean reversion. This paper implements a trading strategy combining

mean reversion and momentum in foreign exchange markets. The strategy was
originally designed for equity markets, but it also generates abnormal returns when
applied to uncovered interest parity deviations for five countries. I find that the pattern
for the positions thus created in the foreign exchange markets is qualitatively similar
to that found in the equity markets. Quantitatively, this strategy performs better in
foreign exchange markets than in equity markets. Also, it outperforms traditional
foreign exchange trading strategies, such as carry trades and moving average rules.
8. Estimating risk of foreign exchange portfolio: Using VaR and CVaR based on
GARCHEVT-Copula model, Nov 2010
Authors: Zong-Run Wanga, Xiao-Hong Chena, Yan-Bo Jinb, Yan-Ju Zhoua
In this paper they suggest that GARCHEVT-Copula model and applies it to
study the risk of foreign exchange portfolio. Multivariate Copulas, including
Gaussian, tt and Clayton ones, were used to describe a portfolio risk structure, and to
extend the analysis from a bivariate to an nn-dimensional asset allocation problem.
We apply this methodology to study the returns of a portfolio of four major foreign
currencies in China, including USD, EUR, JPY and HKD. Our results suggest that the
optimal investment allocations are similar across different Copulas and confidence
levels. In addition, we find that the optimal investment concentrates on the USD
investment. Generally speaking, tt Copula and Clayton Copula better portray the
correlation structure of multiple assets than Normal Copula.
9. Liquidity in the Foreign Exchange Market: Measurement, Commonality, and
Risk Premiums, Sept 2013.
Authors: Loriano Mancini, Angelo Ranaldo Andjan Wrampelmeyer
In this paper they suggest first systematic study of liquidity in the foreign
exchange market. We find significant variation in liquidity across exchange rates,
substantial illiquidity costs, and strong commonality in liquidity across currencies and
with equity and bond markets. Analyzing the impact of liquidity risk on carry trades,
we show that funding (investment) currencies offer insurance against (exposure to)

liquidity risk. A liquidity risk factor has a strong impact on carry trade returns from
2007 to 2009, suggesting that liquidity risk is priced. We present evidence that
liquidity spirals may trigger these findings.
10. Openness, hedging incentives and foreign exchange exposure: A firm-level multicountry study, 2010
Authors: Elaine Hutson and Simon Stevenson.
In this paper they suggest the benefits of openness to trade are well
established, but the disadvantages of openness are less well understood. At the firm
level trade is the principal source of exposure to exchange rate movements, and
exchange exposure can be moderated by a range of hedging techniques. In this paper
we ask two questions. First, do firms in open economies bear higher levels of
exchange exposure than those in more closed economies? Second, is a strong
corporate governance environment one in which managers are incentivised to
maximise shareholder value by hedging associated with reduced firm-level
exchange exposure? Using a sample of 3788 firms from 23 developed countries for
the period 19842003, we show that the more open the economy, the more exposed
are its firms to exchange rate movements, and this relation holds after controlling for
firm size, industry and several financial variables. We also find a strong inverse
relation between a firm's exchange exposure and the extent of creditor protection in
the country in which it is based. This is consistent with managers acting to reduce the
likelihood of financial distress in countries where bankruptcy costs are high, and it
underlines the importance of institutional incentives in encouraging value-enhancing
risk management activities.
11. Fluctuations in the foreign exchange market: How important are monetary
policy shocks? , May 2010
Authors: Hafedh Bouakeza, Michel Normandinb
In this paper they suggest the effects of U.S. monetary policy shocks on the
bilateral exchange rate between the U.S. and each of the G7 countries. We also

estimate deviations from uncovered interest rate parity conditional on these shocks.
The analysis is based on a structural vector autoregression in which monetary policy
shocks are identified through the conditional heteroscedasticity of the structural
disturbances. Unlike earlier work in this area, our empirical methodology avoids
making arbitrary assumptions about the relevant policy indicator or transmission
mechanism in order to achieve identification. At the same time, it allows us to assess
the implications of imposing invalid identifying restrictions. Our results indicate that
the nominal exchange rate exhibits delayed overshooting in response to a monetary
expansion, depreciating for roughly ten months before starting to appreciate. The
shock also leads to large and persistent departures from uncovered interest rate parity.
Variance-decomposition results indicate that monetary policy shocks account for a
non-trivial proportion of exchange rate fluctuations.
12. Foreign Exchange Trading in Emerging Currencies: More Financial, More
Offshore, March 2011.
Authors: Robert N. McCauley, Michela Scatigna
In this paper they suggest Foreign exchange turnover evolves in a predictable
fashion with increasing income. As income per capita rises, currency trading cuts
loose from underlying current account transactions. In parallel, an increasing share of
trading in the currency takes place outside the home country. At given income levels,
moreover, currencies with either high or very low yields attract more trading,
consistent with their role as target and funding currencies in carry trades.
13. The role of implied volatility in forecasting future realized volatility and jumps in
foreign exchange, stock, and bond markets, Jan 2011
Authors: Thomas Buscha, , Bent Jesper Christensen, Morten rregaard
Nielsen.
In this paper they suggest that the forecasting of future realized volatility in
the foreign exchange, stock, and bond markets from variables in our information set,

including implied volatility backed out from option prices. Realized volatility is
separated into its continuous and jump components, and the heterogeneous
autoregressive (HAR) model is applied with implied volatility as an additional
forecasting variable. A vector HAR (VecHAR) model for the resulting simultaneous
system is introduced, controlling for possible endogeneity issues. We find that implied
volatility contains incremental information about future volatility in all three markets,
relative to past continuous and jump components, and it is an unbiased forecast in the
foreign exchange and stock markets. Out-of-sample forecasting experiments confirm
that implied volatility is important in forecasting future realized volatility components
in all three markets. Perhaps surprisingly, the jump component is, to some extent,
predictable, and options appear calibrated to incorporate information about future
jumps in all three markets.
14. The foreign exchange market: return distributions, multifractality, anomalous
multifractality and the Epps effect, Oct 2010.
Authors: Stanisaw Drod Jarosaw Kwapie1, Pawe Owicimka and Rafa
Rak.
In this paper they suggest a systematic study of various statistical
characteristics of high-frequency returns from the foreign exchange market. This
study is based on six exchange rates forming two triangles: EURGBPUSD and
GBPCHFJPY. It is shown that the exchange rate return fluctuations for all of the
pairs considered are well described by the non-extensive statistics in terms of qGaussians. There exist some small quantitative variations in the non-extensivity qparameter values for different exchange rates (which depend also on the time scales
studied), and this can be related to the importance of a given exchange rate in the
world's currency trade. Temporal correlations organize the series of returns such that
they develop the multifractal characteristics for all of the exchange rates, with a

varying degree of symmetry of the singularity spectrum f(), however. The most
symmetric spectrum is identified for the GBP/USD. We also form time series of
triangular residual returns and find that the distributions of their fluctuations develop
disproportionately heavier tails as compared to small fluctuations, which excludes
description in terms of q-Gaussians. The multifractal characteristics of these residual
returns reveal such anomalous properties as negative singularity exponents and even
negative singularity spectra. Such anomalous multifractal measures have so far been
considered in the literature in connection with diffusion-limited aggregation and with
turbulence. Studying the cross-correlations among different exchange rates, we found
that market inefficiency on short time scales leads to the occurrence of the Epps effect
on much longer time scales, but comparable to the ones for the stock market.
Although the currency market is much more liquid than the stock markets and has a
much greater transaction frequency, the building up of correlations takes up to several
hoursa duration that does not differ much from what is observed in the stock
markets. This may suggest that non-synchronicity of transactions is not the unique
source of the observed effect.
15. Foreign exchange transaction system, Nov 2009
Authors: Sholom S. Rosen
In this paper he suggest A realtime multilateral foreign exchange settlement
system having a computer implemented netting system, a processor-based multilateral
settlement coordinator (MSC) having a first money module and a first host
application, where the first host application receives debit and credit data from said
netting system. A plurality of processor-based multilateral settlement agents (MSAs)
each having a second money module and a second host application. A plurality of
processor-based counterparty settlement agents (CSAs) each having a third money
module and a third host application. The second and third money modules

communicate via cryptographically secure sessions. The first money module receives
electronic money from the third money modules of net debit CSAs via the second
money modules. When all net debit counterparties have paid, the first money module
sends the electronic money to the third money modules of net credit CSAs via the
second money modules.