What is meant when we read or hear about Volatility?

09-11-2022 | Harry Mills | treasuryXL | LinkedIn

We all have an intuitive feel for what volatility is – we know when a market is exhibiting high or low volatility because we see differences in price changes. But it pays to be more precise with our language and to understand what is meant when we read or hear about volatility.

By Harry Mills


Defining Volatility

Let’s start with a more instinctual and accessible definition:

Volatility is the rate at which prices change from one day to the next. If some currencies or other financial assets routinely exhibit greater daily price changes than others, they are considered more volatile.

Harry Mills, Founder & CEO Oku Markets

In his preeminent book, Option Volatility & Pricing, Sheldon Natenberg refers to volatility as “a measure of the speed of the market,” which is a particularly useful reference point when we consider that volatility and directionality are two different things: an underlying’s price can slowly move in one direction over time with very low volatility, or perhaps it swings wildly from day to day, but over a year it’s not changed much.

Now we have a feel for what volatility is, how do we quantify it? This third definition explains what it actually is: the annualised standard deviation of returns, and Natenberg refers to volatility as “just a trader’s term for standard deviation.”

This isn’t an article on standard deviation per se, but if you’re unaware of what this means then it is a measure of the dispersion of data around the average. Take for example if we measure the height of 1,000 people:

  • If all 1,000 people are exactly 5’7″ then standard deviation is zero
  • If standard deviation is two inches, then we know that 68.2% of people will be between 5’5″ and 5’9″ (see the normal distribution chart below)
Normal Distribution chart (Wikipedia)
Normal Distribution chart (Wikipedia)

What about “annualised” and “returns”?

Volatility is always expressed as an annualised number – this uniformity means that everybody knows what is meant when we talk about volatility being X%. In that sense, it’s rather like interest rates, which are also always described as an annualised figure.

This might not be so immediately useful to a trader or a risk manager, though, who might be thinking of daily or weekly price movements and where their risk or opportunities lie. Volatility is proportional to the square root of time, so to convert annualised volatility into daily, we simply divide the volatility by the square root of the number of days in a year – but we need trading days  on average there are 252, equating to 21 trading days a month. The square root of 252 is 15.87, but most traders approximate this to 16…

Hence, if we have a contract trading at 100 with a standard deviation of 20%, then: 20%/16 = 1.25%. We would therefore expect to see a price change of 1.25% or less for every two days out of three (+/- 1 standard deviation is around 68%).

Returns… I won’t go into detail, but if you want to explore this I would recommend chapter 10.6, The Behaviour of Financial Prices, in Lawrence Glitz’s superb Handbook of Financial Engineering which explains how price returns follow a normal distribution and prices follow a lognormal distribution. I’ll also add that calculating the standard deviation of prices doesn’t provide meaningful information because what we are looking for is the change from one period to the next, so we need to look at the daily returns!

Still here? Ok… let’s take it down a notch and look at the types and uses of volatility

Types of Volatility

There are a few types of volatility that can be measured, but by far the most commonly used and referred to are historical and implied volatility:

  • Historical volatility is a backward-looking measure that shows how volatile an asset has been over say, a 20-day period. It’s useful to look at different time periods and to chart the daily movement in the volatility.
  • Implied volatility is the future expected volatility – the term ‘implied’ is helpful because it literally means the volatility that is implied by the premium of an option contract. It’s a critical factor that influences options prices and draws the attention of traders and risk managers.

Uses of Volatility as an Indicator

Volatility is a common measure of risk, and it is a key component of Value at Risk modelling. But be warned of the ubiquitous disclaimer that past performance is no guarantee of future results.

Historical volatility is useful to understand how an asset or a currency has performed in the past – you can line this up with significant macroeconomic events and understand why there may have been a period of change, and you can get a feel for how the underlying “normally” behaves. For example, trading in the Turkish lira will probably present a higher risk than in, say the Swiss franc.


  • Volatility is the rate at which prices change from one day to the next
  • It demonstrates the “speed of the market” and is different from directionality
  • Technically, volatility is the annualised standard deviation of returns
  • You can approximate daily volatility by dividing the annualised volatility by 16
  • Historical volatility tells us what happened in the past
  • Implied volatility is the expectation of future volatility, and critical to option pricing

Thanks for reading!


Harry Mills

Founder at Oku Markets

Managing Business FX Risk

Types of Forward Contract

20-10-2022 | Harry Mills | treasuryXL | LinkedIn

A forward contract is an agreement to buy or sell one currency for another at an agreed rate and at an agreed future date. Forwards are traded over the counter, meaning they are not traded on a central exchange; instead, they are privately negotiated, legally binding agreements between two parties, typically a bank or broker and its client.

By Harry Mills


Types of forward contract

For businesses, forward contracts provide a mechanism to secure exchange rates for future exposures and minimise the impact of currency fluctuations and market volatility. Forwards are favoured by treasurers and FDs/CFOs for their simplicity, availability, flexibility, and certainty they provide.

The exchange rate on a Forward is typically higher or lower than the spot rate – this is due to the interest rate differential of the two currencies involved. Read more in my blog post on forward pricing for more information!


The Benefits of Forward Contracts

The decision to hedge or not is unique to each business and its situation. If currency hedging is appropriate and would help a business to reduce risk and achieve its objectives, then forward contracts will likely play an important role in the strategy:


  • Certainty – Guarantee the exchange rate for future payments or receipts
  • Predictability – Securing future conversion rates makes cash flows predictable
  • Flexibility – Some contracts can be used at any time before the maturity date
  • Simplicity – Trade quickly online, in any size, and in most currencies

Types of Forward Contract

The basics apply to all contracts – a set amount, rate, and future maturity date, but there are three main types of forward contracts to be aware of:

  1. Fixed: Settlement is restricted to one future date only
  2. Open: Fully flexible, allowing settlement at any time up to the maturity date
  3. Window: Can be utilised within a window of time up to the maturity date

The open forward gives the most flexibility for drawdowns and utilisation, but it can come at a price: The reason that three types of contract are available is that the forward rate is influenced heavily by the length of the contract and the size and sign (positive or negative) of the interest rate differential of the two currencies involved. There could be a benefit to a business in selecting a fixed or window forward contract, rather than a fully flexible, open contract.

A quick example:

  • An Irish company imports from China in USD (so they sell EUR to buy USD)
  • They have an invoice of $500K to pay in 6 months’ time
  • The spot rate is EUR/USD 1.0000, and the 6m swap points are +0.0120
  • Open Forward exchange rate is quoted at 1.0000, $500K costs €500,000
  • Fixed Forward exchange rate is quoted at 1.0120, $500K costs €494,071


If in doubt, you should speak to your FX provider about forward pricing and which solution would be best for your needs, balancing flexibility and market pricing.

What to look for from your FX provider

Your currency provider should provide you with clear and consistent pricing for forward contracts. They should give you transparent and honest guidance as to the pros and cons of each contract type, and allow you transact how you want, whether that’s over the phone or online.

It’s common for FX brokers to overcharge or “keep” forward points to increase spreads (their margins), so ask for a fixed pricing schedule which includes transparency on forward points.

Open Fwd-va9lk

Window Fwd-tw7b7

Forward with Oku Markets

Oku Markets provides live forward contract trading to clients online and via our telephone dealing desk. We always give our customers fixed, consistent, fair, and transparent FX prices, so you can trust us to work with you, not against you!

Contact us at @[email protected]   or 0203 838 0250 to discuss your needs!

Here’s a quick video of our online platform showing the few clicks to trade:

Thanks for reading 👋


Harry Mills

Founder at Oku Markets

Managing Business FX Risk

What is Pricing Risk (FX Risk) and how to deal with it?

22-09-2022 | Harry Mills | treasuryXL | LinkedIn

Also known as pre-transaction riskpricing risk occurs between a transaction being priced and agreed upon. It materialises when exchange rates change after a quote has been delivered, either impacting the sales margin or incurring a re-price. treasuryXL expert Harry Mills, founder & CEO of CEO Oku Markets, will explain to us what Pricing Risk is all about, and how to deal with it.

By Harry Mills


Who experiences pricing risk?

Businesses experience pricing risk to a greater or lesser extent depending on the nature of their business, their marketplace, and their sales and purchasing cycles. We find it helpful to consider the following initial points when assessing pricing risk:

  1. Is the transaction FX-denominated, influenced, or relatively insensitive?
  2. What is the timeline between quoting and agreement?
  3. What impact would a +/- 5% or 10% FX move have on margins?

A transaction is “FX-denominated” when it is in a currency other than the firm’s functional currency. An example is a UK business providing a quote to an Irish business for an export sale denominated in euros (instead of GBP).

How much influence? An example…

You’ll likely have an intuitive idea of the level of influence that fluctuations in FX rates have on your transactions, but consider a UK company that designs and builds high-end bespoke summer houses (why not?):

  • The company imports unfinished timber and metal fixings priced in dollars, and sources glass and other furnishings and materials from within the UK
  • The per-unit cost of production will be affected by movements in the GBPUSD exchange rate because timber is a major cost
  • But the basket of production costs also includes the UK-sourced materials, shipping, labour (design and build), amongst others (warehousing, storage etc.)
  • So we can see that a 5% drop in GBPUSD wouldn’t result in a 5% increase in production costs – understanding this relationship and ratio is critical

“Businesses should understand the precise impact of currency fluctuations on their costs and/or revenues to determine their FX sensitivity, especially concerning pricing risk”

Harry Mills, Founder & CEO Oku Markets

One-Size doesn’t fit all

Getting to grips with pricing risk can be fairly straightforward for FX-denominated transactions with a straight-through and linear FX impact on the price, but most businesses have a more complex setup.

Many businesses are converting from a just-in-time to a just-in-case stock strategy. which can bring complexity and may add to pricing risk. It’s our view, here at Oku Markets, that there is no one-size-fits-all approach for currency management, so here’s a few areas to think about:

  • Stock cycle and costing method
  • Pricing strategy and flexibility
  • FX price sensitivity (as detailed above)
  • The competitive environment and market practices

Pricing risk can impact procurement and sales, although we mostly think about the pricing that we are delivering. What about the pricing we receive, as customers? It’s not uncommon for Chinese exporters to add a large buffer to their prices to factor in fluctuations and depreciation in the USDCNY exchange rate. Read more about China and the yuan.

So it’s worth considering and asking your suppliers and international partners about how they manage FX – is there an opportunity for increased transparency and better terms by tackling the problem together?

FX Risk Map

It might be helpful to visualise the lifecycle of a transaction to identify when currency risk occurs. Again, there is no one-size template for this – every business’ FX Risk Map will look a little different, but here’s a basic setup to get started with:

  • Pricing Risk: the FX risk between quote and agreement
  • Transaction Risk: the FX risk between agreement and settlement
  • Translation Risk: the FX risk between accounting (PO/invoice) and settlement
FX Risk Map copy-cwoah

Dealing with Pricing Risk

Three ways you can reduce pricing risk and deliver more consistent results are:

  1. Include a quote expiry date – limiting the time reduces risk
  2. Add an FX buffer to the price – 5% is typical for short periods
  3. Build an FX clause into the quote – transparency means no surprises

The most appropriate route or combination of mitigating actions is unique to each business. An online travel company delivering live holiday prices will require higher frequency updates to FX rates and a tighter quote expiry date and FX buffer when compared to a company providing quotes for custom-designed summer houses.

When it comes to an FX buffer, we suggest considering the volatility of the currency pair and adjusting for the relevant quote period.

Let us help you quantify your FX risk

Quantifying currency exposure requires thought and specialist skills and expertise. Most FX brokers lack the capabilities to do this properly, resorting instead to emotionally-charged deal-making which can result in poor outcomes for clients.

We’re proud to work transparently with our clients, and we work hard to break the asymmetry of knowledge and information in the FX market.

You can contact us for a review of your currency processes and for our guidance and suggestions at [email protected] or 0203 838 0250.

Thanks for reading 👋


Harry Mills

Founder at Oku Markets

Managing Business FX Risk

Discussion LinkedIn poll | The Dollar-Euro exchange rate reached parity for the first time in two decades

25-08-2022 | treasuryXL LinkedIn |

We analyze the results of the most recent treasuryXL poll on today’s corporate treasury concerns in this third edition of the newsletter. We’ll show you how treasurers voted to express their opinions on a current issue, and a few treasury experts will explain their positions.

We have invited Patrick Kunz, Harry Mills and Paul Stheeman to share their views on the current topic.

Is the trend in the dollar-euro exchange rate something to worry about for treasurers?

We talked about whether treasurers should be concerned about the present trend in the Dollar-Euro exchange rate in last month’s poll. 38 people participated in the poll, and the results are shown in the image below. Thank you to everyone who voted.


What do treasurers think?

The results indicate quite clearly that the Corporate Treasurer is, of course, very much aware of the current trend. The exchange rate remains volatile, as the euro has even currently fallen to a new two-decade low. A number of treasuryXL experts have expressed their views regarding the current trend and how it may or may not affect treasury activities.

Views of treasuryXL experts

Patrick Kunz

Patrick voted for the option to keep a close eye on the current trend

“The main reason for keeping an eye on it is so a treasurer can estimate what the impact of a falling Euro or stronger USD will be on the company’s financials.”

Keeping an eye on the Euro-Dollar rate is not necessarily to know what the current rate is. The main reason for keeping an eye on it is so a treasurer can estimate what the impact of a falling Euro or stronger USD will be on the company’s financials. Both in the field of FX hedging (not all companies hedge 100% of their exposure but have a rolling hedging policy) and higher hedge costs (forward points have increased due to larger interest rate differences with the US).

But also the sensitivity of the exchange rate on profits and sales is important. For example, if you sell in USD, you suddenly earn more in EUR and you probably sell more. On the other hand, if you buy in USD, it becomes more expensive while your EUR price is fixed. Is it perhaps cheaper to buy elsewhere? What is the impact on the cost price and total demand and turnover of the product? Do the prices need to be adjusted? All questions that the treasurer does not have to answer but that he can signal to his colleagues (CFO, Procurement, Sales etc.).


Harry Mills

Harry voted for the option to keep a close eye on the current trend


“Currency risk aside, treasurers have other headaches to contend with when currencies exhibit high volatility and/or experience a large directional shift (trend) in value.”

The euro’s descent from above $1.20 in mid-2021 to below parity with the dollar has been well covered in the financial media, and the impact on European importers is obvious: higher import costs, squeezed margins, and pressure on business performance. Currency risk aside, treasurers have other headaches to contend with when currencies exhibit high volatility and/or experience a large directional shift (trend) in value. Let me name a small sample of potential areas for attention

Hedge Maintenance and Funding Requirements

Managing the currency hedging position, in line with policy, requires maintenance – trading in derivatives such as forward contracts and options, which presents its own challenges when exchange rates change over time. Additionally, FX swaps are used to balance cash positions and manage liquidity: it’s typical for swaps to be deployed to rollover the settlement on a hedging trade, or to bring forward a delivery. A lower EUR/USD spot rate compared to the hedged rate could incur a funding requirement if the position is out of the money when rolling-over or extending (i.e., for a euro-buyer / dollar-seller).

Treasurers as internal Consultants

Treasurers will need to work with the risk team and other stakeholders to manage internal expectations and provide guidance into the business. Preparing commentary, analysis, and forecasts using proprietary research and that of appropriate external sources, such as banking and consulting partners, is a critical area in which treasurers can demonstrate additional value. Business leaders will be aware of the EUR/USD parity story from headlines, but taking advice and information from trusted internal resources could be invaluable.

Collateral and Margin Calls

For European importers, selling the euro to buy the dollar, a move below parity will likely mean their hedging position is in the money, but of course, future hedging trades may well be at less favourable rates. For those firms selling the dollar to buy the euro however, they may find that they are losing headroom on their trading lines and could face margin calls as the sustained fall in the euro erodes their position value. Regular stress-testing of position valuations should give ample forewarning of any calls for additional collateral, and frequent communication with liquidity providers should provide the opportunity to discuss trading terms and spreads, which are liable to be adjusted in times of high volatility.

Currency Options

EUR/USD volatility has risen to multiyear highs, meaning that option premiums are higher. Treasurers will need to manage the impact of higher hedging costs and ensure an appropriate balance of cost-efficiency and hedge effectiveness is achieved. Another way EUR/USD breaking below parity could be a concern for treasurers is regarding option payoffs, and especially for path-dependent trades such as knock in or knock out options. Exotic options and multi-leg “structured” products can return a vastly different outcome in the event of a large shift in the underlying spot rate. Care should be paid to model various scenarios for the impact on the hedging and liquidity position, and to offer guidance on the appropriateness of such transactions.

Paul Stheeman

Paul voted for the option that there is no need to be concerned

“The recent movements in the EUR/USD may seem extreme at first glance, but historically they have in no way gone outside of trends or ranges we have seen before.”

I think treasurers should not be over-worried about the current movement in EUR/USD exchange rate. Let me explain to you why.

Every company should have a sound FX policy. This policy should take into account the possibility of increased market volatility. Some companies believe that their balance sheet is strong enough to deal with fluctuations in exchange rates and therefore will not hedge much, if at all. Others will want to manage their risk by using futures contracts or options. These instruments allow CFOs and Treasurers to hedge at a comfortable level. The only ones who may have sleepless nights are those who have not implemented a coherent hedging policy. But under normal circumstances, any Treasurer will ensure that such a policy is in place and implemented.

Moreover, European importers are concerned about the strength of the USD and the weakness of the EUR. But the current volatility in the market is by no means extreme. Over the past seven years, we have seen prices move between 1.25 and 1.00. In the seven-year period between 2008 and 2015, we saw rates between almost 1.60 and 1.10 . In that period, the euro has fallen twice as much as it has in the past seven years. Or look at the volatility over a shorter period, during the financial crisis between 2008 and 2010, when we saw rates move dramatically in both directions over much shorter periods. The recent movements in the EUR/USD may seem extreme at first glance, but historically they have in no way gone outside of trends or ranges we have seen before.