UsingFractals to Improve Currency Risk Management Strategies

Most businesses in Australasia face great difficulty in planning for future requirements due to often-volatile fluctuations in currency and commodity markets. New analytical techniques based on “fractal analysis ” suggest that market data exhibits temporal correlations (i.e. volatile fluctuations tend to occur around the same time, punctuating periods of relative stability), and fat-tailed probability distributions (i.e. more extreme events than might be expected from a normal “bell curve ” distribution). By contrast, traditional techniques based on linear models fail to cope correctly with volatility, and may fail badly during these periods. This leads to the possibility that some companies have been making policy and optimisation decisions based on methods that may be detrimental. In this paper it is discussed how fractal methods can correctly characterise the currency market, and how this might affect trading strategies.