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1、FOCUS
2、GLOBALPleaserefertoimportantinformationand12August2019MARdisclosuresattheendofthisreportQUANTITATIVE&DERIVATIVESAlookatGBPvolsaheadofthe31OctoberBrexitdeadlineKEYMESSAGESInvestorattitudetowardstheUK’swithdrawalfromtheEUvaryfrom(i)avoidinginvolvementduetothebin
3、arynatureoftheprocess,(ii)buyingoptionalityoutrightwithoutexposuretoanydownside,and(iii)recognizingtheriskthatelevatedrisk-premiaexposeoutrightlongvolpositionstoamarkdownintheeventofanyfavorabledevelopments.TheGBPUSDvolsurfaceispricedforabinaryevent,with1m-in-3mand4
4、mGBPUSDFVAstradingbetween15.5and15.9,beforedroppingsharplyto10volsfor1m-in-5mFVAs1m.ThisdoesnotcapturethepossibilitythattheGBPvolsurfacefindsanewequilibriumhigherintheeventofano-dealBrexit,orashiftofrisk-premiafurtheroutthecurve,ie,intheeventgeneralelectionsareheld,
5、orthedeadlineispushedpastthestartof2020.Furthermore,3mand6mGBPUSDrisk-reversalstradenear3ylows,yetfourvolpointsbelowtheFebruary-August2016levels.GBPUSD3mdigitalputswithexpiriesbelow1.13arelongrisk-reversals.Similarly,delta-hedged25dGBPUSDriskiesofferanattractivewayt
6、opositionforasharprepricinginvolsfromcurrentlevelsinthefurtherspotweakness,withveryminimalstaticcarry+roll(onadelta-hedgedbasis)orpositivestaticcarry+rollonanondelta-hedgedbasis.TRADEIDEASInvestorsmayconsiderthefollowing:Trade1:Buy5m-in-4mGBPUSDFVAofferedat10.8vols.
7、Thespotstarting4mATMvoltradesat12vols.Thetraderollsdown0.6volsoverthefirstmonth.Trade2:Buy3m1.12GBPUSDdigitalputofferedat11.2%.Thetradeislongvega,andlongrisk-reversal.Trade3:Buy6m25dRR(1.1440/1.2799),offeredat26bp(vols12.85/10.27),spot/ref:1.2075.Inlightofthepolitic
8、aldevelopments.intheUK,weFromavolperspective,investorattitudetowardstheUK’srecentlyupgradedourprobabilityofanodealBrexitwithdrawalfromtheEUvaryfrom(i)avoidinginvolvementscenarioto50%from40%(seeBrexit-Boris’s.duetothebinarynatureoftheprocess,(ii)buyingdilemma.optiona
9、lityoutrightwithoutexposuretoanydownside,and(iii)recognizingtheriskthatelevatedrisk-premiaexposeFurther,wenowviewanelectioninQ4ashighlyout
