Are FX options signaling complacency over French election risks?
July 5 (Reuters) -The FX volatility upon which FX options thrive is an unknown, yet key parameter of their premiums, so dealers use implied volatility - their best guess. But this bellwether for real FX volatility expectations has almost erased all of the additional risk premium it had accumulated before the first round the of the French election and opens questions about complacency before Sunday's deciding second-round vote.
When the election was called on June 9, there was a rush to hedge the risk of a far right victory and its potential negative effect on the euro. Euro-related FX options saw their implied volatilities jump and contracts that allowed holders to sell the euro versus buying it, saw a huge spike in demand and premium.
Despite the far right National Rally (RN) winning a majority of the 76 seats in the first round, the left and centrist parties hope that tactical withdrawals of their weakest candidates will deny the RN winning enough of the remaining 501 seats to form a government, but it's not assured.
Benchmark 1-month expiry EUR/USD implied volatility gained almost 3.0 to new long term highs at 8.0 before the first round, but has reverted to the mid 5's. One-month expiry risk reversals saw EUR put over call implied volatility premiums reach 1.5 from 0.15 - they have since reverted to 0.45.
Before the first round vote, overnight expiry options (10 a.m. New York time on Monday) were significantly higher than current levels, despite the July 5 U.S. NFP data being in the current mix.
Those wanting to hedge the risk of a far right majority and euro related volatility/losses might find value in current FX option prices.
For more click on FXBUZ
EURO RELATED 1-MONTH VOL https://tmsnrt.rs/4brvW8l
EUR/USD FXO 25 delta risk reversals https://tmsnrt.rs/3VZxCQO
(Richard Pace is a Reuters market analyst. The views expressed are his own)
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