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Derivatives

Euro/Krona Vol Spikes On Equity Market Surge

One-week Swedish krona/euro implied volatility shot up a full percentage point last week as several hundred million euros worth of euro calls/krona puts hit the European foreign exchange options market. The krona tends to appreciate on the back of global equity gains, particularly in the tech sector, because Ericsson is a major component of the Swedish stock market. "The krona is dependent on the stock market, so when the market goes up, so does the krona," said a trader. As a result, one week implied vol rose to 9.5% Thursday from 8.5% a week earlier. He said a wide variety of corporates entered trades between EUR20-50 million (USD18-44 million) and that the several hundred million euros that traded represents approximately twice the normal volume for the currency pairing. Strikes ranged between SEK9.35-9.45, mostly with short-term tenors out to two months. Most of the options were entered when spot was SEK9.5 early last week. It was SEK9.35 last Thursday.

Ian Stannard, a foreign exchange strategist at BNP Paribas in London, said the krona remains the most undervalued currency in Europe. "The main argument is the improving economic environment and the first signs of improvement in the high-tech sector," he said. The krona almost touched SEK10 versus the euro in September, at the equity market lows. "We've seen equities turn around since then, which has helped the krona, and we're looking for this trend to continue," he said. The bank has a target of EUR9.20 by the end of the first quarter.

EUR/SEK Spot & One-Month Implied Volatility

  Source: J.P. Morgan

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