BUZZ-COMMENT-Bank of England risk to GBP - according to FX options

Reuters12-18
BUZZ-COMMENT-Bank of England risk to GBP - according to FX options

Dec 18 (Reuters) - Overnight expiry FX options now include Thursday's Bank of England policy decision and related FX volatility premiums will offer clues to the expected FX reaction.

Volatility is an unknown, yet key, parameter of an FX option premium, so implied volatility is a substitute. Any disparity between implied and actual/realised volatility over the life of the option makes FX volatility a tradable asset. Changes in implied volatility will therefore offer insights to the perceived expectations for a currency pair, especially when their expiry date includes a major event.

Overnight GBP/USD expiry now includes the Bank of England and U.S. Federal Reserve policy announcements. It's posted a fairly significant increase from 8.0 to 13.5 since Tuesday - a premium/break-even of 43 USD pips to 71 USD pips, which is the highest since the U.S. election when it reached 22.0 or 116 USD pips.

Overnight EUR/GBP might be a better gauge of pure BoE volatility risk to GBP. Its gains are more limited to 9.0 from 7.0 - a premium/break-even of 31 GBP pips from 24 GBP pips. For context, its implied volatility was 9.75, or 33 GBP pips, when it included last week's European Central Bank policy decision.

Overnight EUR/USD and JPY-related FX options now reflect the extent of Thursday's U.S. Fed and Bank of Japan policy announcement volatility risk to related FX nL8N3NI1I5 nL8N3NI1JK

For more click on FXBUZ

Overnight expiry GBP/USD and EUR/GBP implied volatility https://tmsnrt.rs/3ZKKM5Q

(Richard Pace is a Reuters market analyst. The views expressed are his own. Editing by Mark Potter)

((Richard.Pace@thomsonreuters.com))

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