August 8, 2018 / 11:30 AM / a year ago

Sterling/dollar risk reversals at 17-monthth low, signal more weakness

British Pound Sterling and U.S. Dollar notes are seen in this June 22, 2017 illustration photo. REUTERS/Thomas White/Illustration

LONDON (Reuters) - Nine-month and one-year sterling/dollar risk-reversals fell on Wednesday to the lowest since early-March 2017, as investors rushed to protect themselves from further weakness in the British currency.

Risk reversals are a gauge of investor expectations for a currency’s direction and are used to hedge against expected moves. The fall in sterling risk reversals indicates greater demand for put options, derivatives that give investors the right to sell an asset.

Call options offer the right to buy.

The fall in nine-month GBP9MRR= and one-year sterling risk reversals GBP1YRR= suggests investors are rushing to protect themselves against more sterling downside between now and into 2019 by buying put options.

The options move came after the pound plummeted on spot markets to its lowest level in nearly a year GBP=D3 on investor angst that Britain is headed for a cliff-edge Brexit. Britain is due to leave the European Union at the end of March 2019..

Reporting by Sujata Rao and Tommy Wilkes

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