By Ritvik Carvalho
LONDON May 15 Less than a month ahead of
general elections in Britain, investors appear to be shelving a
typical ploy against risk.
One-month pound/dollar implied volatility - an option that
allows investors to insure against large swings in prices over
the next 30 days - was just over 7 percent on Tuesday, close to
its lowest levels since December 2015.
Strategists say that reflects the high degree of certainty
among market participants about the outcome of the June 8 snap
elections and their comfort that it will not produce any kind of
larger shock to the pound.
Polls point to a victory for Prime Minister Theresa May's
Conservative Party over the opposition Labour Party that could
match Margaret Thatcher's 1983 landslide victory.
"The market doesn't expect sterling to move around a lot
this election, and the reason sterling vols declined so much is
because spot has rallied," said BNP Paribas currency strategist
The dip also comes at a time when a number of broader
indicators of financial market volatility are at record lows.
Analysts have been debating the source of this fall in
volatility in recent weeks, worried in part that previous such
periods have come ahead of major market shocks, including the
2008 financial crisis.
Investors expect this trend will hold until the business
cycle turns and economic growth falters.
"Underneath the bonnet, the realised volatility is just very
very low and that is keeping implied volatility low," said
Richard Benson, co-head of portfolio investment at currency fund
As this graphic shows, close-to-close volatility - a measure
of realized volatility - on the pound versus the dollar is
currently at 5.4 percent, nearly 3 percent below its historical
average of 8.3 percent.
(Reporting by Ritvik Carvalho, editing by Pritha Sarkar)