FXWIREPRO: Optimize AUD/CHF Vols With Vega Instrument to Hedge Downside Risks

FXWIREPRO: Optimize AUD/CHF Vols With Vega Instrument to Hedge Downside Risks

4 April 2016, 15:17
Roberto Jacobs
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FXWIREPRO: Optimize AUD/CHF Vols With Vega Instrument to Hedge Downside Risks

The current implied volatilities of ATM puts of AUDCHF are spiking at 18.42% and at 12.85% for 1 week tenors.

You will understand the option price sensitivity if you have to evaluate these vols and option greeks with probabilistic figures in distinctive scenarios of OTM and ITM strikes.

The options pricing (%change) of OTM strikes seems reasonable, which means more likelihood of these puts expiring in the money.

Since the Vega is the sensitivity of an option’s value to a change in volatility, here in case of AUDCHF ATM vega is at 0.0004 and it has been stabilized over OTM put strikes .

Vega is generally larger in options which have longer time until expiry, and it falls as the option approaches expiry. This is because an increase in IV is more beneficial for a longer term option than shorter tenors, you can observe this with option calculator (see for AUDCHF 1w and 1d contracts, vega is higher in case of 1w expiries when IVs are at 12.76%).

It is usually expressed as the change in premium value per 1% change in implied volatility, and if you compare these values with strikes above 0.7320, both probabilities and vega are less. As a result, we reckon any vega instruments above ATM strikes but not beyond 0.7250 are more conducive in bearish hedging strategies.

You can also observe the performance of these contracts (see %change in premiums).

Currency Hedging Strategy:

Any potential downswings should be optimally utilized during high volatility times, so as to participate in that downtrend, weights in the portfolio should be doubled with ATM puts in order to give the leveraging effects. The profitability can be maximized for every shift towards downside and this is not the same on upside.

Hence, Weights are to be more to cushion downside risks as a result, we recommend holding 2W at-the-money 0.51 delta call and simultaneously hold 1lot of 1M out of the money Vega put (use lower strikes but not beyond 0.7250), go long in 1 lot of 2W at-the-money -0.49 delta put options.

The material has been provided by InstaForex Company - www.instaforex.com

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