Using options to limit downside risk in FX portfolios: A USD/CHF Example

The foreign exchange market is widely appreciated to be the largest and most liquid market of all global financial markets. However, it is susceptible to shocks which can cause significant unexpected volatility, such as the timing of the Swiss National Bank’s (SNB) decision to remove its 1.20 floor on the Swiss Franc versus the Euro on 15th January 2015. The article examines the effects of this volatility on investors with long USDCHF FX Forward exposure compared to those with long USDCHF FX Options exposure.