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Oct 16 - 08:55 AM

AUD/USD - COMMENT-AUD/USD Downside Fears And Attractive Protection

By Richard Pace  —  Oct 16 - 07:25 AM

AUD/USD probably has more downside potential amid Australia-China tensions and dovish central bank expectations, with large 0.7000 option barriers looking more vulnerable nL1N2H60AF.
But there are options that can offer protection, and they look attractive at current levels.

AUD put/USD calls allow holders to sell AUD/USD at lower levels for an upfront premium, while hedging the option with cash to also capture any interim volatility, regardless of direction.

One-month implied volatility is on par with its fair-value measure - one-month historic/realised volatility - meaning a cash-hedged option would pay for itself if the FX rate repeated the past month's performance.

However, one-month expiry now captures the U.S. election, Reserve Bank of Australia, and U.S. Federal Reserve meetings, increasing the volatility risk.

With AUD/USD at 0.7075 and one-month implied volatility at 10.8, a 0.7000 strike has a premium/break-even of 60 pips.

If hedged with long AUD cash to neutralise the strike risk, it would still benefit from bigger AUD/USD declines and subsequent gains in implied volatility, with any increase in actual volatility inflating its profit potential.

For more click on FXBUZ

AUD=D3 Click here

AUD/USD 1-month implied volatility on par with its daily historic measure Click here

Refinitiv IFR Research/Market Commentary


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