BUZZ-COMMENT-FX options flag extent of U.S election risk
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.
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3-month FX implied volatilityhttps://tmsnrt.rs/3k8SG3g
(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.