FxWirePro: Weekly G10 FX-Derivatives Round-Up

FX vols underwent through a bi-modal pattern since late February, rising sharply until around March 20th and dropping almost as steadily since then. Currently, G10 IVs are dipping again considerably (refer above nutshell). The rise was associated with the “shock” component linked to the most acute phase of the COVID-19 crisis. Current valuations appear to be benignly pricing the economic follow-up to the health crisis. VXY-G10 pricing is less than 3vol pts from the mid-February all-time low.

Accordingly, tactical gamma indicator is firmly back into the FX short vol territory. Defensive vol positions are clearly feeling it. Rather than scrapping them we suggest alleviating the pain by adding risk harvesting legs.

While yielding attractive risk/reward DNTs fade elevated vol premia at defined downside. 3M EURJPY and USDTWD top the ranking based on the binary range vs the trading range measure.

Waning directional drivers support de-correlation (USDCAD >  USDCHF <) dual digi that comes at 65% discount.

Fade risk premium baked into NOK wings via delta- hedged 6M ATM/25D symmetric fly or ATM/25D/10D call fly.

Sharply higher political noise lifted USDCNH skew to the top of the EM pricing but that skew is bound to underperform amid capped spot weakness.

Performance of the FVA / delta-hedged ratio put spread packages has been historically robust and can ease the pressure on defensive yen fwd vols positions.

We develop a framework for optimal sizing of vanilla options across strikes based on a utility maximization approach that trades on disagreement between option implied and historical distributions. Courtesy: JPM