Options point at tension over pound

Uncertainties are rising both in political situation and monetary policy as BOE and economic data shows contrasting expectation.

This may be the year of uncertainty for UK and pound -

• Pound is clearly lacking a direction of its own. It is going up against Euro and Yen led by BOJ and ECB monetary policies but going down against dollar clearly led by speculation over rate rise in US.
  
  
• UK on the other hand according to analyst is to face an election whose outcome is most uncertain in 100 years.

Top contenders are -

• Current ruling conservative party whose win add another uncertainty over UK's position in European Union. Prime Minister David Cameron promised referendum on such in 2017.
  
  
• Another contender Labour party led by Mr. Ed Milliband poured cold water over tying up with Scottish national party (SNP).
  
  
• SNP might win close to all the sits allotted for Scotland and aiming for round 2 of referendum to free Scotland.

Option market -

• The cost for hedging against pound volatility is going up and the surge is much higher than last year. Cost to hedge is hovering above 10% if election dates are included.
  
  
• Pound and the option market might not have priced the uncertainty completely yet as this time around inconclusive results could get messier as the last. Last time 2010 cost to hedge has gone up close to 14% and pound fell more than 3% after the election.
  
  
• As of now, writers are asking for 25% more premium to hedge against downside.