Implied FX volatility has fallen sharply over the summer. According to our FX volatility valuation model, the low level of volatility has created buying opportunities.
In this document, we take a quantitative approach comparing the price of 1Y at-the-money FX options relative to currencies' sensitivity (beta values) to different asset classes in order to determine where to buy FX volatility when for example hedging against falling equities, higher US interest rates or large oil price fluctuations.
Importantly, we do not estimate the likelihood of declining asset prices but rather we aim to identify buying opportunities in the FX volatility market.
Equities : We find that investors who expect a decline in global equity prices should consider buying a 1Y USD/SEK call option.
US interest rates : Investors hedging against higher US interest rates should consider buying FX volatility in USD/RUB or USD/CHF.
Oil price : Investors exposed to a significant increase in oil prices should consider buying FX volatility in USD/RUB, while, in our view, USD/SEK is the most attractive currency pair when hedging against a decline in the Brent oil price.
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