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Oct 20 - 06:55 AM

USD/JPY - COMMENT-U.S Election Risk And Attractive USD/JPY Protection

By Richard Pace  —  Oct 20 - 04:45 AM

Actual FX volatility, on which options thrive, is lacking in USD/JPY, so it's no surprise to see implied volatility/option premiums falling, but the U.S election could turn things around.

Implied volatility gauges actual volatility expectations and determines option premiums.
For expiry dates after the U.S election, it's above its fair value measures.
Although it eased over recent sessions, implied premium to historic volatility is at long-term wides and flags the risk premium that dealers are reluctant to surrender nL1N2HB05X.

Implied volatility will typically edge higher as election day nears, as headline risk and related volatility start to increase.

That can favour two-week options.
They now expire at 10 a.m.
New York on Nov.
3.
They don't capture the result, but their premium to historic volatility is much less than post-election dates and would capture any preceding volatility.

Traded in conjunction with a cash hedge, dealers will regularly neutralise the option's strike risk with cash to monetise the actual volatility, and at 85 pips for a two-week straddle, look like an attractive option.

For more click on FXBUZ












2-week USD/JPY implied volatility Click here

1-month USD/JPY implied volatility premium to 1-month daily historic Click here

Source:
Refinitiv IFR Research/Market Commentary

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