Pound under accumulative pressure, hedge GBP exposures through 1Y forwards and straddles

The latest slowdown in GDP numbers of UK has added more curiosities to the UK polls and has been a setback for David Cameron. The growth of 0.3 percent in last quarter is much lesser than the expectation as a result sterling started weakening soon after this data but shown strength during the course of the day.

Having noticed the forthcoming news driven trading sessions, we advocate that GBP oriented overheads can be safeguarded against any further probable falls in EUR/GBP. However, we look for this currency cross to be relatively stable going forward despite the short-term uncertainty caused by the upcoming UK election.

Hence, with little anticipation of narrow upside risk may pose to EUR/GBP due to the election, this risk is offset by other factors too such as the uncertainty related to the Greek debt woes that tend to weaken the EUR.

Strategically hedging using derivative contracts:

We advocate hedging expenses payable over the coming 12 months though OTC forwards. Currently I year forward contract of this pair is trading as below,

Or

Those who are risk averse can also use a straddle. This combination assumes a neutral movement but expects high volatility as in this case UK elections and Greece threat on the contrary. A straddle is best suitable in such inevitable circumstances. Buy ATM call and ATM put option simultaneously and both contracts are to be of far month (3 month expiry). As shown in the diagram, this scenario makes money only if underlying currency move up or down beyond breakeven point by expiration.