Given the relatively low level of implied volatility in the FX market, we think it is time to consider buying longer-dated FX options either as an FX volatility position or as a proxy hedge as part of a hedging strategy on other asset classes.
Despite the recent uptick in implied FX volatility, our model still sees some buying opportunities in the 6M and 12M tenors. In particular, EUR/USD and USD/SEK volatility is cheap, according to our valuation model.
Our quantitative business cycle model has turned increasingly negative with a synchronised move lower across Europe, the US, Japan and emerging markets.
A move to 'red' has led historically to more volatile FX option volatility with a tendency to spike. We see improved risk-reward for selective long vega strategies.
FX Strategy:
Clients considering hedging USD assets should buy 2Y EUR/USD call option The long 2Y EUR/USD call option strategy is break-even after six months (assuming unchanged spot and forwards) if implied volatility increases from the current 8% to 10.6% (18M implied volatility was last seen at 10.60% on 3 January 2017).
Clients considering hedging global equities should buy the USD/SEK call option (note that fundamentally we are bearish USD/SEK and do not expect global equities to decline significantly).
To read the entire report Please click on the pdf File Below