In one of the less interesting press conferences of the year, ECB President Mario Draghi focused on the new challenges presented by Brexit but gave very little away in terms of whether action could be needed and what such action might entail. While acknowledging the uncertainty induced by Brexit, Draghi also pointed to the need for more information, while describing the euro area as relatively resilient in the face of global risks.

Clearly, the ECB wants the dust to settle a bit more, with financial market developments not stressing them too much. The lack of action on changing the limits for the asset purchases could indicate some legal and technical concerns (linked to the aim of avoiding being in a blocking minority position). While Governing Council members may be hoping that higher rates will expand the universe, we still expect that the ECB will need to adjust the limits in September.

Hedging Framework:

The implied volatility of 2W expiries are spiking at 12%, while risk reversals extremely frightening for long-term investors who deal euro versus Japanese yen.

If you have to evaluate these vols and premiums with probabilistic figures in distinctive scenarios of OTM strikes, the options pricing seems reasonable, which means more likelihood of these puts expiring in the money.

Hence, weights are to be more to cushion downside risks as a result, we recommend holding 2m at-the-money 0.51 delta call and simultaneously hold 2 lot of 4m at-the-money -0.49 delta put options.