The Swiss franc floor, 2015

A guarantee withdrawn in a morning

For three years the Swiss National Bank held EUR/CHF above 1.20 and said it would continue to. On 15 January 2015 it stopped, without warning, and the rate fell by roughly a third within minutes. Stop-loss orders filled tens of figures away from where they were placed, retail clients ended the morning owing their brokers money, a hedge fund closed and several brokers failed. It is the clearest available lesson that a stable price is not a low-risk one.

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What the lesson covers

1. What happened
2. Why the floor made things worse
3. What a gap does to a stop
4. What it cost
5. What it teaches

Key terms

• Currency floor — A central bank commitment to prevent a rate falling below a level, held by intervening without limit.
• Gap risk — The risk that a price jumps rather than moves through intervening levels, defeating stops and hedges.
• Stop-loss order — An instruction to trade at the market once a level trades — an order, not a guaranteed price.
• Negative client balance — An account whose losses exceed its deposit, leaving the client owing the broker money.
• Suppressed volatility — Realised volatility held artificially low by intervention, which flatters every risk measure built on it.
• Carry trade — Borrowing in a low-yielding currency to invest in a higher one — profitable until the exchange rate moves.

In practice

European regulators later capped retail FX leverage and required negative balance protection, which moves the gap risk from the client to the broker and forces brokers to hold capital against it. On the institutional side, the episode is the standard scenario for stress-testing a currency book: not a large move, a discontinuous one.

Read next

• FX Forward — Lock in a future exchange rate
• Target Redemption Forward — A better rate that stops once you have won enough
• Barrier Option — A vanilla that switches on or off at a level

In the app, The Swiss franc floor, 2015 carries a five-step lesson, a worked example and a bank of twelve questions drawn differently every sitting.

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Educational content only. Nothing here is financial advice, an offer to trade, or a recommendation to buy or sell any instrument.