FxWirePro: Hedge GBP/JPY with BPS on hawkish statement by BoE’s Carney

Among G10 pool, sterling received a shot in the arm from hawkish BoE governor Carney, who said that "the point at which interest rates may begin to rise is moving closer given the performance of the economy".

More GBP buying today cannot be ruled out if we get a further rise in average earnings for the three-month period through May (forecasts: 3.3% yoy). But for foreign traders are advised to safeguard their FX exposures through suitable hedging arrangements, we came up with some instances and recommended below strategy.

We feel GBP is in good shape but is it good enough to keep our currency exposures in naked positions and confront Yen's uncertainty; this has certainly been a tough call.

Therefore, bear put spread shall be used over Protective Put as the premiums on naked puts prove too costlier.

Bear Put Spread = ATM Protective Put (193.112) + Sell another Put with lower Strike Price (Out of the Money = 189.551).

Bear Put Spread reduces the cost of hedge by the premium collected on the OTM put and keeps hedger to participate on upward moves but it comes at the expense of Partial hedge rather than a complete hedge.