Bloomberg Foreign Exchange Analytics

Version 1.0, August 2009

FXFM User Guide

FX Rate Forecast Model User Guide

Overview
The FX option markets implied volatility surface contains a tremendous amount of information on what the market
anticipates the chances for any exchange rate levels being realized in the future are. The challenging question is: how do
we capture this important market sentiment in a medium that is more useful for our customers? By just looking at an
implied volatility surface, like the EURUSD one below, it is very difficult to gain intuition to what exactly the chances of
specific exchange rage levels being realized are. The FX Rate Forecast model translates implied volatility prices from the
FX option market into a language that people are much more familiar with: probabilities.

Figure 1 - EURUSD Implied Volatility Surface from OVDV

FX Rate Forecast Model User Guide

The Overview Tab

The main overview tab for FXFM provides useful functionality for comparing anticipated future exchange rate levels
priced in the option market with actual forecasts from FX analysts. For a given currency pair and pricing date, the user can
select a range and the table will populate with the upper and lower range boundaries and determine the probability that
we will end up within that range on the date shown. A user can to calculate either the one or two standard deviation
ranges or input a specific probability. Note that users often mistakenly think that one and two standard deviations resolve
to roughly 68 and 95 percent, but this is only the case for a normal distribution. Our distributions are not typically normal
and therefore the probabilities for the one and two standard deviation ranges can vary.

Figure 2 - FXFM Overview Tab

The row selected in the table will select the distribution to show in the chart on right side of the overview tab. This chart
allows users to directly compare the forecast model implied probability distribution with our actual analyst forecasts from
FXFC. The spot levels are broken down into constant intervals and the values in red represent the probability that the
currency exchange rate will end up within a particular range on the specific date. This is clearly described in the tooltip
that appear for each individual red dot. We also have the ability on the chart to graph our analyst forecasts. For each level
we can determine how many contributors predicted the currency spot rate to reach a particular level. For dates that do not
correspond to our actual end of quarter or end of year forecasts we interpolate. Users can also toggle on and off the
current spot level, the forward, the median consensus forecast and the range.

FX Rate Forecast Model User Guide

The Probability Calculator Tab

The probability calculator allows users to ask the forecast model specific questions to determine the probability of
currency exchange rate scenarios being realized. There are two types of scenarios: those which are realized on a specific
date and those that are realized at anytime during a date range. This can be compared to European and American style
options. Users will be allowed to input one or two levels corresponding to the scenario selected unless they have chose the
gain or loss option. If the gain or loss scenario is chosen a user can input a percentage move to determine the level. This
gain or loss feature allows for a user to grasp the skew in the market. The screenshot below illustrates that the USDBRL
exchange rate at the time had a greater probability of gaining 5% by year end compared to losing 5%. Scenarios and
required inputs are described below. Note that you can type specific dates in the Start and End fields or select useful
tenors such as Today, 1M or Q4 09 (the actual date will then appear as a tooltip).

Figure 3 - FXFM Probability Calculator Tab with USDBRL Skew Example Highlight
European Style Scenarios (On a Date):
Above: Level 1, End
Below: Level 1, End
Between: Level 1, Level 2, End
Outside: Level 1, Level 2, End
America Style Scenarios (During a Date Range):
Gain: %, Start, End

FX Rate Forecast Model User Guide

Loss: %, Start, End

Touch: Level 1, Start, End
No Touch: Level 1, Start, End
Touch Either: Level 1, Level 2, Start, End
Double No Touch: Level 1, Level 2, Start, End