Currency-market volatility is starting to look like a no-show, making hedging strategies too costly to maintain for some.
As central banks’ hawkish drumbeat drags on and global growth stays surprisingly resilient, the swings that investors bought options to protect themselves against have yet to materialize.
Currency volatility has been crushed and strategies attempting to time its return have been unsuccessful. JPMorgan Chase & Co.’s index tracking six-month implied volatility for Group of 7 currencies shows levels hovering around their lowest in over a year.
“We’re seeing less and less demand for FX volatility,” said Julian Weiss, head of global G10 vanilla options at Bank of America Corp. “Investors who had bought hedges and positioned for a more volatile environment earlier in the year ultimately had to be stopped out because they simply weren’t performing.”
The options contracts used for hedging offer investors the right to buy or sell an asset if market prices hit a certain level. If they fail to do so, the premium paid for the option is lost and the strategy is unprofitable.
As the euro trades in its tightest yearly range against the dollar since inception and implied volatility for the pair over the next six months oscillates around a 17-month low, the market offers no reason to ramp up hedges, according to Mark Dragten portfolio manager at Insight Investment.
Until more concrete signs emerge of the broader backdrop changing, investors are taking “unnecessary risk by utilizing their whole risk budget,” he said. Historically, volatility is at average levels — suggesting cheap hedges may get cheaper, he said.
Some firms are trying to profit from the continued decline.
“The world will not fall apart,” said Dominic
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