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Jun 11 - 07:55 AM

AUD/USD - COMMENT-Are AUD/USD Options Worth The Highest Premium In G10 FX?

By Richard Pace  —  Jun 11 - 06:00 AM

AUD/USD implied volatility is the highest in G10 FX, and has been throughout the crisis, but is it justified? FX options profit from actual volatility, and don't necessarily care about direction.
Implied volatility is the perceived estimate of future volatility and key to pricing of FX options - those buying it hope that actual volatility will outperform that estimate.
Options are typically delta neutral, meaning the options strike risk is offset by an opposing position in the underlying asset (AUD/USD cash in this case).
As AUD/USD moves, this underlying cash hedge is constantly readjusted, with the aim of offseting more than the cost of the options premium.
Past actual (historic) volatility over a given period is a good gauge of value - one-month daily historic is 12.75 and one-month hourly historic is 14.5.
Comparing that with current 13.25 implied volatility for a typical one-month expiry delta-neutral straddle therefore shows that based on past performance, more frequent cash hedging is likely to return a profit.
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Benchmark 1-month implied volatility in most commonly traded currency pairs Click here

1-month AUDUSD vols Click here

Refinitiv IFR Research/Market Commentary


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