Exploring the depths: How low options prices impact FX
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July 11 (Reuters) -FX option implied volatility is trading 3-year lows in the benchmark 1-month expiry EUR/USD contract and is under broad based pressure across other currency pairs and maturity dates, but what does this mean for FX markets?
FX volatility is an unknown, yet key parameter of an FX option premium, so dealers use implied volatility as a stand-in. In a perfectly priced option, FX realised volatility would match implied volatility. However, that's rarely the case and while the disparity allows option markets to trade any offset between implied and realised volatility, levels of implied volatility can provide an FX bellwether for the broader FX market.
When implied volatility is low it highlights expectations of low realised volatility, often within familiar ranges and against a backdrop of strong risk appetite. These are the perfect conditions for carry trades that benefit those holding higher yielding currencies and being short of lower yielding currencies, as it will reassure investors that there's less perceived risk of any adverse currency moves that could erase their profits.
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1-month expiry FXO implied volatility https://tmsnrt.rs/3LgM9Cu
Richard Pace is a Reuters market analyst. The views expressed are his own. Editing by Mark Potter
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