Before we begin with the hedging frameworks one should understand the potential risks of the underlying pair of GBPCAD.

In just last three and a half months, the pair has declined from the recent highs of 1.9302 to the current 1.6868 levels, (i.e. almost more than 12.6%) and the trend is likely to prolong further .

Moreover, in the UK, the central bank began with easing bias by cutting bank rates by 25bps to keep it at 0.25%, all MPC members unanimously voted for this decision (0-9-0).

The main reason behind this decision is that the BoE would not want to add any extra strain on the markets and the British economy in conjunction with the Brexit apprehensions by allowing any speculation about an adjustment of its monetary policy.

Elsewhere, in OTC markets, ATM IVs seem to be quite poised to factor in the weakness in this pair as we could see a reasonable increase in IVs of 1W and 1M tenors. As a result, we recommend capitalizing on the sustainable IV factor by employing ITM short puts as the central bank's decision was also in line with market's expectations and matching this with ATM longs to construct short-term back spreads that is likely to fetch positive cash flows as per the indications by sensitivity table.

When trying to assess how a spread may perform, looking at the 3m IV skews spreads of deeper in the money option shorts for an indication of relative option prices. (For a demonstrated purpose we’ve used 1% ITM instruments, in real times use longer expiries on ATM longs.

So, keeping all these attributes in mind, here goes the strategy, go long in 1M 2 lots of ATM -0.50 delta put, and in 2M (1%) OTM -0.36 delta puts, while shorting 1 lot of ITM put (0.5%) put with 2-week expiries.

Subsequently, the slight upward or sideway swings would derive the positive cashflows through the initial receipts of shorts which could be utilized for reducing hedging cost.

While on the other hand, more weights on longs would likely take care of prevailing major bear trend, in other words, as the spot price keep dipping (as per sensitivity table) these long positions gain more. Ultimately, any potential declines are most likely to be arrested.