FxWirePro: NPV of USD/CAD ATM puts seem costlier – offset via option arbitrage

The implied volatility of ATM contracts for near month expiries of this the pair is at around 7.9% and for 1w expiry at 8.65%.

NPV of 1w ATM call is 616.84 while premiums trading above 14.28% at CAD 704.93 for lot size 100,000 units.

NPV of 1w ATM put is 697.27 while premiums trading above 14.44% at CAD 697.27 for lot size 100,000 units.

Hence, comparing this difference in options premium with implied volatility and market upward sentiments we think the hedging cost for downside risks would not be economical as result of deploying ATM instruments.

But we cannot afford to get stuck in this riddle without hedging, so what's the alternative, in forwards markets at least..?, subsequently, here comes the strategy arbitrage strategy in which options trading that can be performed for a riskless profit as USDCAD ATM call options are overpriced relative to the underlying exchange rate of USDCAD.

To perform this conversion, the hedger holds the underlying spot FX and offset it with an equivalent synthetic short spot FX (long put + short call) position.

Profit is locked in immediately when the conversion is done, the profit would be strike price of call/put - purchase price of underlying + call premium - put premium.