USD/CHF Extreme Event Monte Carlo Simulation Model

28 July 2017, 12:59
Ahmad Hassam

If you remember on 15h January 2015, Swiss National Bank suddenly un-pegged Swiss Franc from Euro.

In just a few minutes USD/CHF fell more than 1800 pips.

Traders who were trading Swiss Franc CHF pairs suffered catastrophic losses.

Forex brokers lost millions of dollar. FXCM lost more than $300 million from that event.

Alpari and a few other brokers went belly up and declared bankruptcy.

This one decision played havoc with the financial markets. USD/CHF and EUR/CHF fell like stones.

I have written this blog post in which I build a Monte Carlo Extreme Event Simulation model for USD/CHF.

I build a mixture model comprising of three normal distributions and one binomial random variable.

Binomial random variable is used to model the jump and choose the normal distributions.

Extreme event simulation has become important in the last few years.

GBP/USD suffered a flash crash last year when it fell more than1400 pips in less than 2 minutes and then recovered.

We should be ready for extreme events like these happening anytime and include them in your models.

I have used R language to build the USD/CHF extreme event Monte Carlo simulation model.

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