NEW YORK, Oct 6 (Reuters) – Foreign exchange markets are growing less fearful about the outcome of next month’s U.S. presidential election, judging by the fall in longer-dated implied volatility on options, the main measure of how much risk is perceived.
Currency options investors are increasingly betting that Democratic challenger Joe Biden will conclusively defeat President Donald Trump, given his lead in prediction markets and national polls.
This can be seen in the fall of some prices for implied volatility, which measures how much the options market believes spot exchange rates will move over a given period and is distinct from actual or realized volatility.
Biden opened his widest lead in a month in the U.S. presidential race after Trump’s positive coronavirus test as a majority of Americans believed he could have avoided infection if he had taken the virus more seriously, the latest Reuters/Ipsos poll showed.
Options are widely used to hedge against expected moves ahead of a major event. “Vol” is a key input in the price of an option and can vary for an instrument depending on supply and demand for options and time to maturity. The higher the volatility, the greater the uncertainty over a given term.
Options strategists pointed to flatter implied volatility curves for most currency pairs and said longer-dated volatility, three months and onwards, traded lower than the shorter-dated vols.
This suggested that investors are expecting less chaos and a calmer market weeks after the Nov. 3 election. The three-month volatility extends until December and any view or expectation of turmoil will be reflected in the options pricing for this period.
“The market is assuming that there is a higher probability of a Biden presidency and that there won’t be as much uncertainty after the election as the market was previously thinking,”