The following analysis uses a proprietary G10 FX implied volatility index which I created quite a few years ago. The index is a G10 FX 1-month implied volatility index which weights are derived from the BIX FX triennal surveys for the year 2001,2003 & 2007. If you want more information on the exact formulation of the index feel free to contact me pollux@argonautae.com for a chat. For the time being suffice to say that the G10 FX volatility index is a broad and accurately weighted measure of G10 FX risk.

In my approach I recognise that the nominal level of implied volatility is a crude metric of risk therefore I also use two other measures, namely Volga and the ShockIndex. The Volga is simply the volatility of the G10 FX volatility index over a given period. This measure highlights how uncertain and unstable the level of risk in G10 FX has become. Though generally positively correlated those measures of risk can diverge from time to time. You can have a high level of volga whilst G10 FX volatilities are trading at rather innocuous levels. This is not a trivial observation as the leverage undertaken by market participants tends to be an inverse function of market volatility which implies a greater vulnerability when volatility becomes uncertain at low levels and therefore cannot be accurately budgeted for. The ShockIndex is the ratio between the Volga and the G10 FX volatility index at the beginning the historical window chosen to evaluate the Volga. It quantifies sharp changes and acceleration in risk levels. Historically it has proven to be a good classifying measure for market event risks in FX markets.

The below charts shows those three measures both relative to a time axis and their historical distribution. The red lines are the 95% confidence intervals, the purple line the median. The blue line highlight the current level. The Volga and ShockIndex in this report are evaluated over a period of 14 days. The medians and 95% confidence intervals are calculated over the full history going back to 1996 though the charts shows only the recent years.

At close of business the **2016-12-27** the G10 FX volatility index was estimated at **9.2** **%** at the **76.7** percentile. The 14-day G10 FX Volga was estimated at **5.2** **%** its **72.3** percentile and the shockindex at **0.6** or its **66.3** percentile.

The above charts are useful, however their visualisation is quite limiting. On the one hand we need quite a few charts to present the data on the other hand it is difficult to show the full G10 FX volatility Index history going back to 1996 as this would make the charts unreadable. Therefore clustering and aggregating the whole data into a single chart should be useful to the end user. To answer this I use a mapping technique developed by Kohonen in the 1980′. It uses an unsupervised neural network to re-arrange data around meaningful clusters. Though computationally complex is a practical way to summarise multidimensional data into a low (usually 2) dimensional system.

The below chart shows how the G10 FX Volatility Index history was split into 4 distinct clusters. Those clusters where computed not only as a function of the G10 FX Volatility Index level but also as a function of the other discussed variables, namely Volga and Shockindex.

Since 1996 the G10 FX volatility Index traded **59** **%** of the time in Cluster 1, **30** **%** in Cluster 2, **8** **%** in Cluster 3 and **3** **%** in Cluster 4. Overall the layering provided seems quite intuitive as the increase in risk and time spent in each cluster points toward what would generally be expected from market risk regimes ranging from low to high risk.

In the chart below we zoom on the various regimes within which the G10 FX Volatility Index hasevolved for the current year. so far it remained **68** **%** of the time in Cluster 1, **24** **%** in Cluster 2, **8** **%** in Cluster 3 and **0** **%** in Cluster 4.

Finally the below chart shows a Self Organising Map of the above mentioned risk metrics. The data has been grouped and colored as a function of four clusters of increasing market risk regimes. Obviously as shown on the map, the minimum level of volatility pertains to cluster 1 and the highest to cluster4. The current regime and its progression from 21 days ago is also highlighted on the map.