Huge demand for one particular French election hedge
June 28 (Reuters) -There has beena significant increase in premium and demand for an array of Euro related FX options since the announcement of impending French elections, but one particular trade stands out - risk reversals.
Risk reversals are simple vanilla FX options that consist of a put strike set against a call strike - the right to sell a currency versus buy it. They benefit from increased FX volatility - implied and/or realised in a particular FX direction.
EUR/USD risk reversals have seen their EUR put over call (EUR/USD downside over upside) strike implied volatilities increase dramatically since the announcement of French elections. The benchmark 1-month expiry 25 delta risk reversals peaked above 1.5 from 0.15 since the French election announcement to reflect the increased risk of EUR/USD falling and increasing FX volatility.
These risk reversals are still being bought on any setback from their initial highs and are trading in much greater amounts than the 30-million euro average, which highlights the ongoing need to cover EUR/USD downside risk. A 1-week expiry 25 delta risk reversal traded on over a billion euros a leg (put versus call) at 1.3 and a 2-week expiry 10 delta risk reversal at 2.8 on 750-million euros a leg mid week.
Overnight expiry options now include the first round election results on Monday and are primed for EUR related volatility and potential EUR/USD losses.
For more click on FXBUZ
1-month and 1-year expiry EUR/USD 25 delta risk reversals https://tmsnrt.rs/4bn3jJe
(Richard Pace is a Reuters market analyst. The views expressed are his own)
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