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Feb 12 - 06:55 AM

AUD/USD - COMMENT-Low Cost Options To Hedge Vulnerable AUD/USD

By Richard Pace  —  Feb 12 - 06:25 AM

There could be a greater chance of AUD/USD extending its setback than regaining lost ground, which could reward those tempted to buy related FX options from current 2-year lows.

A hawkish hold from the Reserve Bank Australia last week failed to boost the AUD and AUD/USD is still vulnerable to a stronger USD and risk aversion.
Slowing global growth, and especially weak China growth, will continue to weigh on AUD, as will iron ore which is tightly correlated and already starting to fall.

Implied volatility gauges FX realised volatility when determining an FX option premium.
It's trading at 2-year lows amid the broader lack of FX realised volatility and has therefore reduced the cost of holding AUD/USD options.

Risk reversals retain an implied volatility premium for AUD puts over calls, which suggests that AUD/USD implied volatility is still expected to rise if AUD/USD falls.

From current levels, implied volatility may have more upside than downside potential, especially if AUD/USD losses should accelerate.
Outright AUD put options are half the cost of straddles and would benefit more from AUD/USD losses, while adding a knock-out trigger below the strike price offers further reductions to the initial premium.

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Source:
Refinitiv IFR Research/Market Commentary

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