FxWirePro: Strategic hedging framework with gamma spreads for Australian exporters’ concern of 1W IVs

The downside risk in AUD against USD is anticipated ahead of the Fed's rate decision seems to be in line with the Yellen's hints after she sent strong indications that US economic conditions are likely to justify an interest rate hike at some point this year.

For Australian exporters who have their receivable exposures in USD, we advocate buying ATM (At The Money) AUDUSD put options.

Prevailing implied volatility rates for AUD/USD is almost close to 12%. As the risk appetite varies from different investors to different traders, we've customized our formulation of strategies for such varied circumstances.

When the above naked put option was highly sensitive to moves in the underlying exchange rate of AUD/USD when gamma was at around 0.15. We think it adds to the risk and reward profile for both holders and writers.

Thus, on a long term hedging perspective, debit gamma put spreads are advocated so as to reduce the sensitivity and focus on hedging motive. Selling an Out-Of-The-Money put option is recommended to reduce the cost of hedging by financing long position in buying In-The-Money Puts as the selling indications are piling up on weekly graph.

So, buy 15D (1%) In-The-Money -0.67 delta put option and short 15D (-1%) Out-Of-The-Money put option for net debit.