The Aussie dollar gained earlier today during Asian trading session as investors moved on from a central bank rate cut to a record low 1.75% the previous day and focused on U.S. jobs data at the end of the week.
The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, eased 0.04% to 92.98.
Data announcement scheduled for the week:
Today:
ADP Non-farm employment change
US non manufacturing PMI
Australian retail sales
Australian trade balance
Tomorrow:
US unemployment claims
RBA monetary policy statement review
Friday:
US Unemployment rate and non-farm employment change
Hedging Strategy:
Before we begin, let's glance over OTC nutshell, we consider 1W IVs of 14.38% at spot FX 0.7500 levels which is still the highest among G10 currency pool and 12.74% for 1M tenors.
The implied volatility here is significant while trading FX options, as the price of FX option depends on future volatility, although it is impractical for anyone to guess accurate future volatility, however, it is possible to calculate the marketplace’s expected future volatility using the option’s price itself.
ATM call premiums are trading 21.72% more than Net Present Value of these instruments.
Since, AUDUSD (from last 6 months) showing some strength against USD, if you have skepticism whether it can be sustainable if Fed keeps deferring its policy decision.
While leveraged accounts remained bullish on commodity currencies, led by the AUD. They raised their net AUD longs by USD0.8bn to USD3.4bn, the highest since Sep 14.
Contemplating these disparities between option pricing, trend, reducing IVs in long run, RBA’s rate cut shock, subsequently, the Calendar Spread is advocated to hedge puzzling swings in both short term and long term, so please monitor the following Calendar Setup:
Go Short in near month (1%) OTM Call at USD 759.37
Go Long in mid month (1%) ITM Call at USD 1525.31
Thereby, net debit is reduced to USD 765.94, and the implied volatility as a function of moneyness for a fixed time to maturity is generally referred to as the smile. The volatility smile is the crucial object in pricing and risk management procedures since it is used to price vanilla, as well as exotic option books.
OTM strikes, rely solely on extrinsic value and have a low Delta, Theta, and Vega. But a move towards the OTM territory increases the ATM Vega, Gamma and Delta which boosts premiums.
The degree of moneyness of an option can be corresponded to the strike or any linear or non-linear transformation of the strike. (Forward-moneyness, spot-moneyness, delta).
The material has been provided by InstaForex Company – www.instaforex.com