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What did the SNB do to EURCHF options markets?

The Swiss National Bank made G10 FX a lot more fun to watch today. One interesting thing is how the options markets responded.

Via Jared Woodard of BGC, here’s a chart comparing the move in one-week implied volatility in the exchange rate between the Swiss franc and the euro — basically, the cost of hedging the risk that the franc appreciates plus the cost of hedging the risk that it depreciates — against the actual move in the EURCHF exchange rate:

What did the SNB do to EURCHF options markets?

Woodard notes that the options market was relatively slow to respond to the massive currency move, and that the ultimate cost of hedging actually ended up higher after the exchange rate retraced about half of what had happened.

We also decided to look at the implied 5-year volatility, in part because we remembered this chart from an October note by Goldman:

What did the SNB do to EURCHF options markets?

For those who don’t recall our discussion of their argument, GS wrote that the implied volatility of the exchange rate was a good proxy for the franc’s appeal as a haven currency for residents of the euro area. With volatility low, the currency ought to depreciate. We wondered whether this was a useful signal given the SNB’s commitment to prevent the franc from appreciating. And it turns out we may have been right, since the removal of the cap not only lead to a huge spike in the franc but also in the 5-year implied vol of the EURCHF exchange rate:

What did the SNB do to EURCHF options markets?

(Simply plugging the new numbers into Goldman’s chart suggests that the “fair value” of the franc is now closer to 1.2 to the euro. For what it’s worth, this means that the “gap” between the current exchange rate of about 1.04 francs per euro and the “fair value” is now smaller in percentage terms than it was before the SNB changed its policy.)

You shouldn’t read too much into what these measures are telling you about actual market expectations for the future, since “implied volatility” tends to simply equal past volatility plus some premium associated with the cost of buying insurance in the options market. Still, the action in the options markets does corroborate the other evidence that Switzerland is attracting a lot of flight capital from, among elsewhere, the euro area.

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Matthew C Klein
Hi! I first got into economics and finance while working in the woods of Westport, CT for Bridgewater Associates in 2008-2010. One of the many things I learned there was that I find it more satisfying to explain the markets than actually work in them. So I ended up leaving to help out with research for an upcoming biography of Alan Greenspan, which involved, among other things, reading every single Fed meeting transcript from the middle of 1987 through 2006.
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