GBP Hedging Costs Rise to 6 Year High as Brexit Referendum Looms

The cost of hedging against sharp swings in sterling surged to its highest in almost six years on Wednesday, three months before a June referendum on Britain’s European Union membership, and coinciding with narrowing bookmaker odds on a vote to leave.

Sentiment towards the pound has soured this week after the resignation of a senior pro-“Brexit” minister and criticism of finance minister George Osborne and his 2016/17 budget.

Sterling came under more selling pressure on Tuesday on a view that the deadly attacks in Brussels would boost the campaign to take Britain out of the EU.

Implied volatility on three-month sterling/dollar options, covering the period that includes the “Brexit” referendum on June 23, soared to 14.50, the highest level since mid-2010.

Three-month euro/sterling equivalents rose to 13.70, the highest since April 2009, according to Reuters data.

Options give holders the right to buy a currency at a pre-set exchange rate at a specific future date and are used either as protection against big swings in the rate or as a way to speculate on such moves taking place.

The three-month sterling/dollar risk reversals, a gauge of demand for options on a currency rising or falling, showed an increasing bias for sterling weakness against the dollar, trading at 4.5 vols – a measure of volatility – compared with 2.4 vols in favour of sterling weakness on Tuesday.

via Reuters

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza