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<h3>FX Option Volume</h3>
<p>Bank of England Staff Working Paper<br />By Robert Czech, Pasquale Della Corte, Shiyang Huang, and Tianyu Wang</p>
<p>The study examines the relationship between the volume of foreign exchange (FX) options traded over-the-counter and future exchange returns. The analysis is based on transactions reported to the Depository Trust & Clearing Corporation derivatives repository.</p>
Yves here. The media has focused on Covid developments, and in the US, the pitched battles over the stimulus package. What is widely acknowledged by those paying attention is that the European stimulus is way too small, and that was before the prospect of yet another set of lockdowns was in the offing. Italian banks were looking plenty wobbly even before Covid took hold, and they’ve long been seen as big enough to have the potential to set off a wider conflagration.
Given the serious and continuing costs of Covid, the EU’s budget short-sightedness will produce avoidable damage to businesses. That will blow back directly to banks, since unlike the US, most corporate financing comes from banks. Interestingly, the authors think a meltdown scenario is possible and recommend direct rescues of businesses over banks.