| | | Brexit Uncertainty — and Fatigue — Continue | | Last week I was putting together some quotes for a client who asked for a hedge using foreign exchange options. Most of our clients use standard forward contracts where we can lock in a price for an FX transaction today to be settled at some time in the future. But this client wanted to buy a contract that protected against a fall in British pounds sterling and offset the cost by selling a contract that protects against a rise in sterling. | | When I priced the contract, I was taken aback by how much more costly the contract was to protect that fall in sterling than it was to protect against a sterling rise. I spoke to an options trader at our parent company, Royal Bank of Canada, to verify pricing accuracy. He confirmed, adding that liquidity in British pound sterling options is currently very low. | | Understanding the direction of currency movements is never easy, but it is particularly difficult with the British pound right now. It is just pure "headline risk" and the possible outcomes are binary – either there will be a Brexit deal or not. There is no in-between. Headlines indicating there might be a deal send sterling higher and those indicating otherwise send the pound lower. | | Watch the video | | If we can help you with any Foreign Exchange needs, please email foreignexchange@cnb.com or call (800) 447‑4133. | | Want to learn more about international finance, economics, and global events? Sign up for our other Foreign Exchange emails and videos! | | | | | | | Follow City National Bank on social media: | | | | | | Non-deposit investment products: | | • | Are not FDIC insured, | | • | Are not deposits or other obligations of City National Bank and are not guaranteed by City National Bank, and | | • | Are subject to investment risks, including possible loss of the principal invested. | | | | | This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors as of the date of the report with no obligation to update or notify of inaccuracy or change. This report is not a recommendation or an offer or solicitation to buy or sell any financial instrument discussed. It is not specific investment advice. Financial instruments discussed may not be suitable for the reader. Readers must make independent investment decisions based on their own investment objectives and financial situations. Prices and financial instruments discussed are subject to change without notice. Instruments denominated in a foreign currency are subject to exchange rate and other risks. City National Bank (and its clients or associated persons) may engage in transactions inconsistent with this report and may buy from or sell to clients or others the financial instruments discussed on a principal basis. Past performance is not an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting. | | | | | | |
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