FX options show extent of SA election risk to USD/ZAR
May 29 (Reuters) -The uncertainty surrounding the South African election result and its potential effect on the rand is reflected by FX option premiums, which are significantly higher.
The ruling African National Congress party risks losing the majority it has enjoyed since 1994, due to persistent poverty and inequality, high unemployment, corruption scandals, an erratic power supply and high crime rates.
Volatility is an unknown yet key parameter of an FX option premium, so dealers use implied volatility as a stand in. Any disparity between implied and realised volatility therefore becomes a tradable asset, but implied volatility changes can also offer an insight in to the perceived realised volatility risk in a related currency pair.
Overnight/next day USD/ZAR FX option is expiry now includes the May 29 election result and itsimplied volatility has jumped to 37.0 from 11.0 - a premium break-even for a simple vanilla straddle of 1.54% of the USD from 0.46% of the USD or 2832 from 841 ZAR pips in either direction.
One- and two-week expiry implied volatility warned of the impending FX volatility risks when their expiry dates first included the May 29 election and they remain elevated. One-week doubled to 22.0 from 11.0 and 2-week up 8.0 to 18.5. The benchmark 1-month expiry included the election from late April when its implied volatility jumped from 12.5 to 15.5.
FX option risk reversal contracts reflect the direction in which FX volatility is expected to increase by demanding an implied volatility premium for option strikes in that direction versus the other. The benchmark 1-month USD/ZAR 25 delta risk reversal has seen its longstanding USD/ZAR topside vs downside strike premium morethan double from 1.2 to 2.75 since including the election result.
For more click on FXBUZ
Overnight expiry USD/ZAR FXO implied volatility https://tmsnrt.rs/3yMfYrr
1-2-week expiry USD/ZAR FX option implied volatility https://tmsnrt.rs/4aEXOFi
1-month expiry USD/ZAR FXO implied volatility https://tmsnrt.rs/4bWjGgF
USD/ZAR 1-month expiry 25 delta risk reversals https://tmsnrt.rs/3VjKzFT
(Richard Pace is a Reuters market analyst. The views expressed are his own)
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