Let’s have a glance on OTC hedging positions for AUDUSD:

Delta risk reversals of AUDUSD: From the nutshell, we understand that 25-delta risk of reversal of AUDUSD has been one of the most expensive pairs to be hedged for bearish risks in the long run as it indicates puts have been relatively costlier. But with positive tickers would imply that minor shifts in OTC positions as the underlying spot may gain little upward traction.

However, as it shows the 3rd highest negative values which indicate downside risks of spot FX is anticipated and hedging for such bearish risks is relatively more expensive.

The OTC options market appears to be well-adjusted on the direction for the pair over the 1m to 1y time horizon as hedgers have been cautious on long-term downtrend that has lasted since mid-April 2013 and as a result delta risk reversal for AUDUSD was turning into negative.

Higher IVs of ATM contracts have been significant as it ensures the parity exists between option premiums and IVs as the 1W ATM puts which in turn could be a cause of concern as to whether spot FX would move in sync with risk reversals or not if IVs were to be tepid.

As a result, we think it is not advisable to generalize to initiate longs in calls just by considering delta factor. OTC indications in all times merely do not be deemed as a hedging tool, in conjunction with these indications we should understand the efficiency of hedging vehicles.

So, the question for now who deals with foreign trades that have exposure in AUDUSD is -

With current positive shifts in delta risk reversals, are the delta calls justifiable?

Risks associated with risk reversals transactions:

• The paid premium will not be reimbursed even if the option is not exercised during the period covered by the transaction;
• The chance to benefit from exchange rate fluctuations applies only up to a certain limit as agreed at the time of entering into the transaction;
• In a case of early termination of the transaction, the client may incur expenses or earn income, the size of which depends on prevailing Forex market situation.

Just in case, suppose that we’ve gone long in calls with attractive delta contemplating risk reversals, all above specified risks are attached to those instruments, hence, in conjunction with delta we should also consider other parameters of AUDUSD which we post shortly in our upcoming article.