Chris Macintosh Blog | Risk Happens Fast | Talkmarkets - Page 2
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Baptized into the world of business and travel at a young age I’ve subsequently lived in multiple countries, traveled to many more and built myself a small fortune investing in businesses and markets that I spend an extraordinary amount of time doing due diligence on.

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Risk Happens Fast

Date: Tuesday, November 1, 2016 8:43 PM EDT

At least having sat and watched the franc peg break the lesson wasn’t lost. And so when it came to watching the renminbi and the problems we’d identified in the Chinese interbank market (something we discussed on the blog as well) we could evaluate the cost of entering the short renminbi trade accordingly since volatility was priced as if it not only didn’t exist as a threat but that it would NEVER exist. We all know how that ended.

The same had been true of the Swiss franc. When it broke, the move was even more explosive.

CHF Volatility

See that long green line at the bottom of the screen?

That’s what you call complacency, trust, and faith. This made no sense given the fundamentals. It was as loony as planning a driving trip across Africa in a Lada, expecting trouble-free motoring.

Now if you look closely you’ll see the line at the very end of the chart is a 90 degree angle. This is the volatility in the EUR/CHF pair when it broke.

As reported by Bloomberg at the time in an article entitled, “No One Was Supposed to Lose This Much Money on Swiss Francs”:

“Goldman Sachs Chief Financial Officer Harvey Schwartz said on this morning’s earnings call that this was something like a 20-standard-deviation event, and while the exact number of standard deviations is of course a subjective matter, that’s the right ballpark. Over the 12 months ended on Wednesday, the annual volatility – that is, the annualized standard deviation of daily returns – of the euro/franc relationship was a bit over 1.7 percent; over the last three months of that period the volatility was less than 1 percent. That converts to a daily standard deviation of something like 0.1 percent. On Thursday, the euro ended down almost 19 percent, or call it 180 standard deviations, depending on what period you use.”

The chart below shows the EUR/CHF currency move which coincided with the volatility shown above.

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