Advances in information technology are behind the widespread adoption of modeling in finance. The most important advance has been the enormous increase in the amount of computing power, concurrent with a steep fall in prices. Government agencies have long been using computers for economic modeling, but private firms found it economically justifiable only as of [...]
In its modern sense, financial engineering is the design (or engineering) of contracts and portfolios of contracts that result in predetermined cash flows contingent to different events. Broadly speaking, financial engineering is used to manage investments and risk. The objective is the transfer of risk from one entity to another via appropriate contracts. Though the [...]
Most of the currency crises of the 1990s happened against soft currency pegs. In the wake of the Asian currency crisis, I made a stab at creating a model which focused on how exchange rates typically performed in the run to and after the break down of a pegged exchange rate regime. For good or [...]
The signal grid and the risk appetite indicator should be the two main tools of the currency strategist. There are however other aspects of the currency markets that still have to be considered. For instance, the type of exchange rate regime is an important consideration as it can have a significantly different impact on the [...]
When there is no clear, unequivocal signal from the signal grid, that is when not all four signals are pointing in the same direction, currency traders and investors can still boost their total return by using a risk appetite indicator to gauge overall market sentiment in terms of “risky” or “safe” assets, both in [...]
The four analytical disciplines of currency economics, flow analysis, technical analysis and long-term valuation which come together to make a currency strategy decision can be expressed in the form of a signal grid. To be sure, this is a very simple model. However, what is important here is having the discipline to create it. Only [...]
The dividing line between currency economics and long-term valuation analysis is somewhat blurred. There is a difference however and it concerns the time span involved in one’s analysis. The aim of currency economics is to look at the parts of the economy that affect and are affected by the exchange rate, such as the balance [...]