Correlation play eyed via vol swaps

By Beth Shah
23 Jun 2014

Investors should consider volatility swaps should the correlation between euro/sterling and sterling/dollar turn positive, therefore widening the volatility spread between the two currency pairs. Sterling/dollar has recently been skewed to the upside, while euro/sterling has dropped since Bank of England governor Mark Carney threatened to hike interest rates earlier than the market expected; meaning the correlation between the two currency pairs has been strongly negative.

The firm suggests going long €/$ three-month volatility swaps, while selling £/$ volatility swaps of the same tenor. The trade is indicatively offered at 0.35 vols, nominal in dollars for both trades. 

“With the BoE early ...

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