One word of caution about the Swiss “Vollgeld” referendum this weekend. The Swiss public is voting on an initiative that basically requires banks to fulfill 100% reserve requirements. Effectively the monetary multiplier gets passed on to the Swiss National Bank. This is quite an event and may send serious shock waves through the market. We are reminded of early 2015 when the SNP stepped back from defending the 1.20 EUR/CHF rate.
It is unlikely that the referendum passes as current polls tilt against the initiative. Nevertheless, it is important to be aware of that event if engaged somehow in CHF risk. Put crudely, we could potentially have a black swan floating on the Lake Zurich this weekend. Option markets appear not to be pricing this tail risks as we publish this. The 1.13 EUR/CHF put expiring Friday after the vote traded for 0.022% today and we took it into our model portfolio. That is a lottery ticket, which has low odds of winning.
Thinking of what kind of odds this may have (Bid/Ask) this event may be an interesting question. We came up with a 95% chance of a "No". The option market prices something like a 1/4500 odd. There are around 195 countries in the world. We see odds as quite high that a few of them would adopt this initiative (which has also some pros) if they were to hold this referendum this weekend. So much about odds...
The key takeaway here is that it appears very cheap to protect assets that are exposed to the CHF exchange rate. Most likely the premium will be lost. Nevertheless, that's trading and balancing risk / reward correctly. Repeated over and over, the strategy is likely to produce a positive outcome over a longer time frame.
It is unlikely that the referendum passes as current polls tilt against the initiative. Nevertheless, it is important to be aware of that event if engaged somehow in CHF risk. Put crudely, we could potentially have a black swan floating on the Lake Zurich this weekend. Option markets appear not to be pricing this tail risks as we publish this. The 1.13 EUR/CHF put expiring Friday after the vote traded for 0.022% today and we took it into our model portfolio. That is a lottery ticket, which has low odds of winning.
Thinking of what kind of odds this may have (Bid/Ask) this event may be an interesting question. We came up with a 95% chance of a "No". The option market prices something like a 1/4500 odd. There are around 195 countries in the world. We see odds as quite high that a few of them would adopt this initiative (which has also some pros) if they were to hold this referendum this weekend. So much about odds...
The key takeaway here is that it appears very cheap to protect assets that are exposed to the CHF exchange rate. Most likely the premium will be lost. Nevertheless, that's trading and balancing risk / reward correctly. Repeated over and over, the strategy is likely to produce a positive outcome over a longer time frame.