US Markets

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

The three-month FX option expiry date is now Nov. 4, thus capturing the U.S election result, and a big spike in related implied volatility highlights the perceived risk to FX markets.

Aug 4 (Reuters) - The three-month FX option expiry date is now Nov. 4, thus capturing the U.S election result, and a big spike in related implied volatility highlights the perceived risk to FX markets.

Implied volatility determines an option premium, based on future volatility expectations, so a rise indicates expectations of a reaction in the underlying FX rate as election results are confirmed.

USD/JPY three-month sees the biggest jump in the major pairings, given its close correlation to risk and stocks, as well as the USD. Three-month implied volatility spikes 7.4 to 8.1 and additional volatility premium for JPY calls over puts (USD/JPY downside).

Pricing models suggest that overnight implied volatility on Nov. 3 for expiry Nov. 4 will be around 39.0 implied volatility, or 172 JPY pips, in either direction for a simple vanilla straddle. That compares with 10.0 or 44 pips today (expiry Wednesday).

EUR/USD three-month implied volatility now 8.0 from 7.6 and AUD/USD 10.75 from 10.3 before expiry captured the election result.

For more click on FXBUZ

3-month FX implied volatilityhttps://tmsnrt.rs/3k8SG3g

(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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