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By Saikat Chatterjee
LONDON, Dec 12 (Reuters) - Traders rushed to the foreign
exchange derivative markets on Thursday to protect their
exposure to the British pound in case of a surprise election
outcome.
The premium for pound puts over calls over the
next week jumped to its highest since September 2016 at nearly
6%. That means more investors want downside protection from
buying the right to sell the pound over the next week.
While the cash markets were relatively quiet, overnight
implied volatility gauges jumped to 45%, their
highest since around the Brexit referendum vote in June 2016 as
investors braced for a rocky night.
A closely watched model from pollsters YouGov earlier this
week put Prime Minister Boris Johnson on course to win a
majority of 28 in parliament on Thursday, down from a forecast
of 68 last month. YouGov also said its model could not rule out
a hung parliament, where no party gains a majority.
While financial markets are positioned for a Conservative
Party majority, investors have ramped up hedging their British
exposure in the case of a hung Parliament.
Adam Cole, chief currency strategist at RBC Capital Markets,
said price action for the pound during the campaign suggested
the currency should have a fairly linear and positive
relationship with the expected Conservative majority and would
gap much lower on an expectation of a hung parliament.
Voters headed to the polls on Thursday in an election that
will pave the way for Brexit under Prime Minister Boris Johnson
or propel Britain towards another referendum that could
ultimately reverse the decision to leave the European Union.
Investors in the cash market have bet on a Conservative
Party majority.
In early trading on Thursday, the pound was steady
around $1.3196 against the dollar and 84.30 pence versus the
euro.
(Reporting by Saikat Chatterjee;
Editing by Tommy Reggiori Wilkes, Larry King)