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FX vol curves, despite the recent retracement, remain still heavily inverted, offering a value in owning fwd vol at a discount vs. spot vol.
Last week, we noted USDMXN and USDRUB as two notable candidates in fwd vol space.
While vol carry (measured as spot fwd vols difference) is traditionally the first metric to measure fwd vols appeal, we also bring into consideration the headroom that fwd vols have if they are to retrace their 15-year high.
Liquidity permitting, the EMEA fwd vols (USDPLN and USDHUF) and USDKRW within Asia EM screen attractively on that measure on the back of so far fairly modest response to the COVID-19 developments (especially within EMEA currency pairs).
Considering the strong lean toward long gamma from the timing model and favorable fwd vols pricing, we recommend synthetic fwd vols via short 3M / long 6M gamma neutral calendar in USDPLN and USDZAR (refer above chart).
The wide dislocations as observed in the market might also imply an elevated reward for embracing long-risk trades. Possibly, keeping in mind the liquidity issue in vol space as mentioned above, one takeaway from the filtering analysis would be to wait until market conditions stabilize before looking at fading any residual risk premia by then.
The wide dislocations as observed in the market might also imply an elevated reward for embracing long-risk trades. Possibly, keeping in mind the liquidity issue in vol space as mentioned above, one takeaway from the filtering analysis would be to wait until market conditions stabilize before looking at fading any residual risk premia by then.
March). This is particularly the case in the Asian space, where risk-reward for such trades is positively skewed, especially for cases like USDINR, EURINR and EURCNH.
Consider:
On USDZAR, sell a 3M straddle at 18.95 vols choice / buy a 6M straddle at 18.5 vols (1.25 vols from mid).
3M ATMF/ATMS put spread on USDINR at USD 1.5% (off spot reference: 75.3, fwd 77.88).
1y ATMF/ATMS put spread on EURCNH at EUR 1.4% (off spot reference: 7.8365, fwd 7.97). Courtesy: JPM
