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FxWirePro: High beta no-touches in EMFX

EM FX looks like it has appreciated more than EUR recently which may give some headwind to the extent of EM moves, if the EUR does not recover further. 

A passive play on a cautiously EM supportive sentiment is to own short-dated USD/EM call no-touches (NTs). These take advantage of elevated levels of spot, forward/NDF points, vols and skews and can be viewed as defined downside alternatives to selling naked vanilla EM puts. 1st chart ranks 2M high beta structures with barriers set to 1-sigma away from spot (arbitrary condition but sets pricing of different pairs on same footing). Vol selling is a poor leverage.

Likewise, 2nd chart shortlisted 2M structures offer 1:1.5 risk/reward ratio, with sensible barrier selection at 1-sigma away from current spot (here, 1-sigma = std.dev. of 2m spot returns over the past 12-months).

To avoid the year-end holiday effect on pricing consider in 3M expiry: 3M USDMXN call no-touch with barrier at 19.90, the level last seen 2m ago, costs 50.0/52.75%, indic, (spot reference: 19.19).

3M USDRUB call no-touch with barrier at 66.0, costs 51/56%, indic, spot reference: 63.80 levels. Courtesy: JPM

By Niranjan Patil
  • Market Data
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