US Markets

BUZZ-COMMENT-Derivatives flag extent of U.S. election risk to FX

Implied volatility gauges future actual volatility expectations and determines FX option premiums, so no surprise the one-week expiry (Nov. 4) was marked higher after capturing the U.S. election result.

Oct 28 (Reuters) - Implied volatility gauges future actual volatility expectations and determines FX option premiums, so no surprise the one-week expiry (Nov. 4) was marked higher after capturing the U.S. election result.

EUR/USD one-week implied volatility is now 11.0 from 6.75 for a simple vanilla straddle (straddles give holders the right to buy or sell the FX rate at a fixed strike at expiry). In premium terms, it's 143 USD pips from 87 USD pips in either direction. Option holders will typically trade an option in conjunction with a constantly adjusted cash hedge, neutralising the strike risk to monetise the actual volatility.

USD/JPY one-week implied volatility has doubled to 10.5 -- now 120 from 60 JPY pips in either direction -- and AUD/USD 10.5 to 14.5, 83 to 115 USD pips in either direction.

Brexit talks already raised GBP/USD implied volatility, but it's still added 2.5 implied vols to 12.0 - a break-even of 173 from 136 pips.

USD/CNH options were already showing signs of panic demand on Tuesday and one-week is now 11.5 from 6.5 - break-even 854 from 482 CNH pips in either direction - with current pricing higher than levels seen before the 2016 election .

For more click on FXBUZ

1-week implied volatility gets U.S election resulthttps://tmsnrt.rs/3oxmrNu

1-week and 1-month USD/CNH implied volatilityhttps://tmsnrt.rs/3oBa7Mn

(Richard Pace is a Reuters market analyst. The views expressed are his own)

((Richard.Pace@thomsonreuters.com))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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