Until 2008, the foreign exchange market was largely dominated by carry trades, where investors take advantage of the interest rate differentials between currencies. However the extreme volatility in the FX and interest rate markets prompted banks to offer alternatives through indices and baskets on which to offer investors structured products.
One of the first movers, last November, was BNP Paribas, which launched FX indices Galaxy Alpha and Alpha Plus as an alternative to the traditional carry trade strategies. The indices were designed to extract outperformance between a dynamic basket, selected every month based on the currencies with the highest interest rate differentials, and a fixed benchmark basket of traditional currency pairs.
