FxWirePro: EM Asia FX hedges via basket of call triplets

Markets retain a "risk-on" bias, after US inflation readings came in a little softer than the consensus. US yields came under renewed pressure, as did the USD, while equities benefitted. US President Trump, however, played down optimism about the proposed restart of trade talks with China. We won’t be astonished that foreign traders are interested in hedging the FX risks via high leveraged FX option structures amid the threats of further worsening within EM. While we emphasize that USDJPY vols and USDKRW fwd vols are recognized as worth buying ahead of the tariff decision. 

Benefiting from favorable correlation setup, Worst-Of structures serve an efficient way of hedging against further EM vulnerabilities. With the great deal of awareness of potential turmoil eventually set on Asia EM, consequently, USD call baskets of triplets of Asia EM & Antipodeans dollar pairs are emphasized (refer 1stchart). 

Well, at 60+% discount in pricing of triplets relative to cheapest outright vanilla, Antipodeans triplets find themselves at the top of the list. Strong commodities link to Chinese economy would make those hedges the favorites if not for the optically already extended move over the past few months. 

Only a throw away on the discount ranking, a KRW-CNH- INR USD basket call triplet offers a direct exposure to the region at still very solid discount (58%) to plain vanillas. Even as Asia EM vols have started to broadly firm up, USD basket call is still priced near the recent low (60bp mids for ATMS strikes). 

The KRW-CNH-INR triplet’s consistent strong performance since March and historically observed occasional bursts of positive returns that have shown tendency to achieve >7x leverage for ATMS strikes (refer 2ndchart) make a strong case for tactically taking a defensive position in EM via a KRW-CNH-INR triplet. At strikes set to 1%, 0.5%, 1.0% OTMS, USD basket call of USDKRW-USDCNH-USDINR costs 34/42bp for 2M tenor and 44/54bp for 3M tenor. Courtesy: JPM

Currency Strength Index: FxWirePro's hourly EUR spot index is flashing at 34 levels (which is bullish), while hourly USD spot index was at shy above -48 (bearish), CNY at 103 (bullish), while articulating (at 09:39 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex