Macro trade - CHF FX volatility

Every time Events in the Nature and Financial markets unfold and lend the observer a better perspective.  Swiss markets are under stress for being prudent in maintaining their balance sheets. Fiscal crisis in USA and Sovereign crisis in Euro area have led investors to safe havens like Gold and CHF CCY. Now this unleashed a gush of money flowing into CHF markets. The force has been so brutal that it strengthened the Swiss ccy and reduced the interest rates in the very front end of the yield curve into negative zone. Volatility markets have also reacted accordingly by spiking the vols.  Definitely lower rates, stronger currency are good for a country. But a nation that has a strong exporting industry that will become a loser in this situation.   Current change in the market is more of panic driven rather than any fundamental shift in the Swiss balance sheet. Central bank has to act to protect the export sector from the sudden changes in the market.  But can you fix plumbing in your neighbor’s house to keep your house in good order. Yes if it’s a leak in the faucet not when there is a hole in the dam that controls the flow of the water.

Impact of panic on Swiss Swap Curve: There has been a strong. Next moving to FX Volatility markets and we can see the short term volatility has doubled in the front end.

The impact in the FX markets has been so strong that Curve move has been very severe. Currency has strengthened and moved towards parity

 

Now keeping these market changes and with our understanding that these moves are clearly panic driven and this situation has clear opportunity. Most obvious area of opportunity is in FX volatility market.

This can be done by selling a straddle and protecting on the higher side with a long OTM call. Net premium received is 60,000.