Implied Distributions from GBPUSD Risk-Reversals and Implication for Brexit Scenarios

11 Pages Posted: 14 Jun 2016  

Iain Clark

Efficient Frontier Consulting Ltd

Saeed Amen

Cuemacro; Thalesians Ltd

Date Written: June 13, 2016

Abstract

Much of the debate around a potential British exit (Brexit) from the EU has centered on the potential macroeconomic impact. In this paper, we instead focus on understanding market expectations for price action around the Brexit referendum date. Extracting implied distributions from the GBPUSD option volatility surface, we estimate that the market expects a vote to leave could result in a move in GBPUSD from 1.4390 (spot reference on 10 June 2016) down to a range in 1.10 to 1.30, i.e. a 10-25% decline - very probably with highly volatile price action. In contrast, a vote to stay could result in a modest bounce in GBPUSD to around 1.47. We apply the same analysis to contrast the behaviour of the GBPUSD option market in the run-up to the Brexit vote with that during the 2014 Scottish Independence referendum, finding the potential impact of Brexit to be considerably higher.

Keywords: Brexit, Foreign exchange, options, implied distributions, Breeden-Litzenberger

JEL Classification: F31

Suggested Citation

Clark, Iain and Amen, Saeed, Implied Distributions from GBPUSD Risk-Reversals and Implication for Brexit Scenarios (June 13, 2016). Available at SSRN: https://ssrn.com/abstract=2794888

Iain Clark (Contact Author)

Efficient Frontier Consulting Ltd ( email )

London
United Kingdom

HOME PAGE: http://www.efficientfrontierconsulting.com

Saeed Amen

Cuemacro ( email )

London
United Kingdom

Thalesians Ltd ( email )

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