Indices offering a benchmark for tracking currency volatilities could open up the possibility of trading index versus component volatility via dispersion trades. The JPMorgan VXY indices, launched last week, are based on the prices of three-month at-the-money option volatilities and give an indication of the volatility the market is expecting, much like the Chicago Board Options Exchange's VIX equity volatility index. The International Index Company has also just launched trade-weighted FX indices to allow players to trade currencies in terms of their trade-weighted value as opposed to trading a certain currency pair.
Sophisticated investors such as hedge funds may look at a dispersion trade on the VXY indices, by buying the index and selling options on a currency basket or pairs included in the index. The indices may also be referenced in structured investment notes designed for retail or high-net-worth investors. These would likely provide capital protection and leveraged exposure to the index.
