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

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 result

1-week and 1-month USD/CNH implied volatility

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


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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