The Curious Incident of Volatility In Three Months’ Time
Although there’s a lot of risky stuff on the political calendar for the next three months, options markets remain silent. Why? In “Silver Blaze,” Sherlock Holmes investigates the disappearance of a racehorse. He points out “the curious incident of the dog in the night-time,” meaning the dog did nothing at all. Had strangers broken in, Holmes reasons, surely it would have barked. Therefore, the dog had to be acquainted with the thief. Something similar appears to be happening in financial markets. The three-month implied volatility of the euro against the U.S. dollar has dropped around 3 percentage points since June and, after a bumpy year, is now back at 2014 levels. This is a gauge of how expensive it is for investors to use options to hedge themselves against swings in the euro versus the dollar happening three months from now. Read more...
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