Posts Tagged ‘fx


INR Outlook..

INR depreciated sharply in the last few weeks and INR spot even touched 49.88 intra-day. Lot of market players were caught off guard with this sharp down move. More than fundamental factors, sharp move had to do more with technical factors. Across the board there was EM currencies long unwinding. Importers and FII’s had unhedged positions in INR and this up-move led to panic among participants. Exporters had already sold off large part of their USD earnings at 45-46 levels, so there was no USD selling at higher levels. It took dollar selling by RBI at 49.8 levels to arrest the sharp slide. Although intervention by RBI was not large (closer to USD 500 m), but it had sentimental impact and Rupee recovered to 48.9 levels.

In the short-term, everything depends on Euro-zone resolution. INR is taking cues from Euro movement. I am not very optimistic on Euro zone resolution. It’s a case of economies having slow or zero growth with high debt levels. But once panic settles down, INR should provide good returns. I will slowly start building positions in Indian currency. If there is capitulation over Euro crises, Rupee can go below March 2009 lows of 52-53. It will be dream levels to go long into Indian currency. If there is capitulation, then commodities along with all asset classes will go down substantially. This will help bring down inflation concerns and pause by RBI, may be cut in interest rates later next year. This will build good case for Indian equities and INR in turn.


Volatility smile

As option trader, the most crucial thing one has to observe is Implied Volatility (IV). When IV of an option and its strike price is plotted, its curve is known as volatility smile. Volatility smile for FX options is U shaped curve which resembles smile. FX volatility smile curve implies that IV’s for At-the-money (ATM) options are lowest, and higher for In-the-money (ITM) and Out-of-the-money (OTM) options.

For equity options, volatility smile tends to be downward sloping. IV decreases as strike price increases. After 1987 US market crash, people are worried about rapidly falling share prices and buy OTM puts as insurance. OTM puts IV’s are higher than ATM and ITM puts.

In one of my previous post, I had written that Reliance Communications (RCom) options have higher IV’s. I thought I should plot volatility smile for RCom calls and puts.

RCom put exhibit typical bookish pattern of reverse skew with ATM puts having lowest IV’s. OTM puts have highest IV’s followed by ITM puts.

RCom Call exhibit forward skew with OTM calls having highest IV’s followed by ATM calls and ITM calls. Normally commodities exhibit forward skew when prices are expected to rise in future.

Reliance Industries (RIL) is struggling on various fronts and this reflects in its share price performance over the past several months. So I thought about plotting volatility smile curve for RIL also.

RIL puts exhibit downward sloping volatility smile curve with OTM puts having highest IV’s, followed by ATM and ITM puts.

RIL calls volatility smile curve exhibit a shape similar to that of currencies. Its shape is different from RCom call volatility smile curve.

February 2019
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