FxWirePro: Hedging opportunity among G10 FX space with gamma positive and vega neutral structures

AUDUSD and NZDUSD vols appear the cheapest within the G10 space, based on the relative-value analysis for ATM vols. As we can see from the below-left chart, Kiwi vol trades near one-year lows and is undervalued by 1.8 standard deviations against its model value (almost a vol point). While volatility premia are currently wide in the G10 space, those on AUD and NZD are amongst the tightest.

Furthermore, we had seen in the previous chart that the Aussie and Kiwi are possibly overvalued in the spot market and, due to their high-beta, could undergo consistent drops in the event of extended USD appreciation in the next few months. A 6m 25delta put on NZDUSD appears to offer value based on the arguments above.  

A second hedge opportunity can be spotted by looking at the EURUSD vol curve. The vol presents a peculiar shape, downward sloping up to 3m and upward sloping from 3m on. The market prices in a higher vol for the 6m maturity due to the uncertainty related to the French election. Still, a long 6m/short 3m vol trade allows for cheapening the cost of the gamma positive long 3m vol trade. By reducing the notional of the 6m leg, the trade can be structured to be gamma positive and vega neutral.