Thread by @vikas_bazaz

I have been talking about USDINR for some time. But one cannot trade comfortably in the product unless understand how the underlying moves. And the best way to understand is historical volatility over different time frame.

Given that equity has India VIX as a reference point, currency does not have as of now. We are looking at how we can help the option traders with this data point. Will come back on this.

But let's today focus on historical volatility. Right now volatility in USDINR is sub 4% but it is not the lowest. It almost touched 3% in Feb'20.

If you are thinking that 3% is too low. There is more to your surprise.

In 2017, it almost sank to as low as 2.5%.

But in same time frame, volatility has also jumped to 12% twice,

1) In 2018 when FED started the QT and oil prices moved higher and

2) In March 2020.

So if you are thinking that you have
seen extreme vols - 2.5% on lower side and roughly 12% on higher side, can be in another surprise when look at the same over 10 Yr timeframe.

In 2013, volatility jumped to as high as 30%+, thanks to taper tantrum and weak domestic macros. Remember, in 2012/13, oil was way above $100+.

Many of us relate to 2008 GFC as the most turbulent period in financial market. No doubt it but when it comes to USDINR volatility, it was the second most volatile period.

But at the same time, if one the historical volatility with NIFTY, 2013 stands no where close to 2008 and 2020.

So looking at the historical volatility, two references can be made out:

1) Avg. volatility in normal time can be construed as ranging between 4.5% to 5.5%, and

2) USDINR is volatile but can remain in a range for a long time, depending upon external and internal environment.

And finally, margin is a function of volatility. So if USDINR has low margin, it means it has low volatility and it is clearly reflected from historical volatility.

Want to know more on margin applicable, can refer to our blog.

kotaksecurities.com/investment-pro…