Euro Zone Sovereign Debt Crisis- Biggest Tail Risk

(PRWEB) November 25, 2011

In a poll conducted by Bank of America and Merrill Lynch this month, all fund managers picked the Euro Zone sovereign debt crisis as the biggest tail risk of the moment that might result in unprecedented financial chaos. InvestTechFX Fx Trading experts explain that investors are concerned about liquidity, which determines their ability to get in and out of securities quickly and many asset managers prefer sticking with more orthodox hedging and vanilla products that have a greater certainty of being paid out. After Lehman Brothers went bankrupt in September 2008, the importance of tail risks has grown by leaps and bounds.

One of the popular hedges for sovereign default, credit default swaps risked being ineffective as CDS-type insurance may not now pay out on that debt due to a voluntary agreement with bank creditors to write off half the value of Greek bonds. The Forex currency exchange experts at the FX trading company InvestTechFX report that it is costly to develop strategies via options with volatility of G10 currencies being five times higher than average and the USD remains the default option for those seeking safety and liquidity in the foreign exchange market. Financial stress tends to see natural hedge flows back to dollars as a lot of leveraged money worldwide is still denominated in dollars, so buying derivatives on non-euro currencies or equity volatility may look like tempting strategies to protect portfolios from the financial storm.

Buying of the VIX, which has been one of the popular hedging plays, is responsible for a sharp equity price decline and though the strategy is already very popular, it is extremely costly. Furthermore, when stocks do go up, the risk is huge.

The online Forex Ecn trading company InvestTechFX is a proven leader in the industry of artificial intelligence software. They are renowned for their top notch trading technology systems in the computerized trading industry whose experts develop advanced, customizable, intuitive, efficient, and sophisticated trading tools that help people understand Forex currency exchanges related trends and developments. Apart from offering new, exciting, and innovative FX trading solutions, they are well known for their detailed and comprehensive learning center.

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