May 16, 2017 / 11:50 AM / 2 years ago

Markets unfazed by UK election, options pricing shows

LONDON (Reuters) - Less than a month ahead of general elections in Britain, investors appear to be shelving a typical ploy against risk.

FILE PHOTO: A British ten pound note is seen in front of a stock graph in this November 7, 2016 picture illustration. REUTERS/Dado Ruvic/Illustration/File Photo

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. GBP1MO=

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 Sam Lynton-Brown.

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 Millennium Global.

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.


Close-to-close sterling volatility -

Reporting by Ritvik Carvalho, editing by Pritha Sarkar

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