What is market volatility and how does it affect foreign exchange rates?
Market volatility can leave investors exposed to fluctuating currency values. Janek Guminski, senior director, head of foreign exchange at ATB, explores volatility and effective risk management.
By ATB Financial 16 October 2020
What is market volatility?
[00:04] Volatility is a key risk factor that needs to be understood when it comes to the dollar. A solid understanding of volatility should lead to better risk management so that you don't get blindsided by a negative move in the currency.
Volatility is a mathematical figure. It provides information on how much and how often a currency is moved over a given period of time. The higher the volatility figure, the greater potential moves in the future. You don't need to get too caught up in the math, but understand that if we're at $0.75, a $0.05 move in the currency would happen much more quickly if the volatility figure is high and would take much longer if the volatility figure is low.
Understanding volatility to manage your exposure
[00:48] The loonie tends to be relatively stable, but still I've seen unhedged clients lose money over a purchase or sale. Volatility is backward looking, but used to forecast the future, which is not always great when it comes to the dollar. Understanding that should encourage you to manage your exposure to changing currency values.
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