FX Option Volume

Speaker: Prof. WANG Tianyu, School of Economicsand Management, Tsinghua University

Chair: Prof. YU Yifan, School of Economics, Zhejiang University

Venue: 426, Buiding of School of Economics, Zijingang Campus, Zhejiang University

Time: 14:00-15:30 on May 26, 2023

Abstract: We study the information content of over-the-counter foreign exchange (FX) option volume using a granular dataset with counterparty identities and contract characteristics. We find that FX option volume negatively predicts future exchange rate returns, especially when the concentration of informed investors increases, during periouds of high dollar demand, and with options offering higher leverage opportunities. Our findings support an asymmetric information model, where informed traders choose whether to trade in the option market to exploit their information advantage. We also document that hedge funds and real money investors display superior skills at predicting future exchange rates compared to less sophisticated players.