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Assignment # 01
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Correlation measures how closely two currency pairs move together. Some currencies tend to
move in the same direction, some in opposite. It helps to hedge, diversify or double profitable
positions. A correlation of +1 means two currency pairs will move in the same direction 100% of
the time. A correlation of -1 means they will move in the opposite direction 100% of the time. A
correlation of zero means no relation between currency pairs exists. If the correlation is high
(above 80) and positive then the currencies move in the same way. If the correlation is high
(above 80) and negative then the currencies move in the opposite way. If the correlation is low
(below 60) then the currencies don't move together.
CORRELATION FORMULA
CORRELATION CALCULATION
• (EUR/USD- EUR/USD): The correlation between the currencies is 1 which shows that
both the currencies move in the same direction 100% of the time.
• (GBP/USD-EURO/USD): The correlation between the currencies is 0.685905 which
shows that both the currencies move in the same direction as it is (above 60) and positive.
EUR/USD goes up; GBP/USD also goes up.
• (USD/CHF- EURO/USD): The correlation between the currencies is -0.074264 which
shows that both the currencies move in the opposite direction as it is (above 60) and
negative. If EUR/USD is making some losses; the other pair will go in profit.
• (USD/JPY-EURO/USD): The correlation between the currency is -0.2622915 which
shows that both the currencies is low (below 60) and negative then the currencies don't
move in the same way.
• (EUR/GBP-EUR/USD): The correlation between the currencies is O.147673 which
shows that both the currencies are low (below 60) then the currencies don't move in the
same way.
• (GBP/JPY-EURO/USD): The correlation between the currencies is 0.271994788 which
shows that both the currencies are low (below 60) then the currencies don't move in the
same way.
• (GBP/USD- GBP/USD): The correlation between the currencies is 1 which shows that
both the currencies move in the same direction 100% of the time.
• (GBP/USD- USD/CHF): The correlation between the currencies is 0.55427639 which
shows that the currencies don’t move in same way as it is below 60.
• (GBP/USD- USD/JPY): In this currencies the correlation b/w them is 0.327484302
which is below 60 ,the currencies don’t move in same way .If GBP/USD goes up then
USD/JPY will move down.
• (GBP/USD -EUR/GBP): The correlation between the currencies is -0.618148 which is
above 60 currencies will move in the opposite way as it is negative.
• (GBP/USD -GBP/JPY): The correlation b/w GBP/USD-GBP/JPY is 0.823812443
which is 82 percent and positive that will move in same direction.
• (USD/CHF- USD/JPY): The correlation between the currencies is 0.622165773 which is
62 percent as it is above 60 and below 80 and positive it move in same direction.
• (USD/CHF -EUR/GBP): The correlation between the currencies -0.8379311 so it moves
opposite direction due to negative sign.
• (USD/CHF-GBP/JPY): The correlation between the currencies is0.720788669 which is
below 80 but positive so move in same direction.
• (USD/JPY- GBP/JPY): The correlation between the currencies -0.7310265 which is
negative currencies move in opposite direction if USD/JPY move down GBP/JPY will
move up.
• (USD/JPY- GBP/JPY): The correlation between the currencies is 0.805348599 which is
80 percent and positive so will move same direction if one currency will move up other
will also move up.
• (EUR/GBP -GBP/JPY): Correlation between the currencies is 0.827479952 which is
above 80 percent so it moves 100% in same direction.
CONCLUSION
Trading in currencies that cancel each other should be avoided. If currencies are inversely
related they eventually cancel each other (loss + profit). If strategy of hedging one currency pair
with another is used then the total loss will not be as bad as if it would be without the second
backup currency. If one pair is making some losses, the other pair will go in profit as the
currencies move in opposite directions. When confident, a trader may double position size by
placing same orders on parallel currency pairs in order to get double profit.
REFERENCES
http://www.oanda.com/currency/historical-rates
http://www.forexhit.com/analyze-forex/currency-correlations.html
http://www.forexmarkethours.com/correlation/06/
http://mathbits.com/mathbits/tisection/statistics2/correlation.htm
APPENDIX