Hedge `Brexit' by Selling Euro as Volatility Gap Hits Record

  • That's advice of BofA, which says euro is underpricing risks
  • Euro-dollar volatility lowest ever versus pound measure

Bank of America Corp. recommends selling the euro versus the dollar to hedge the risk of the U.K. leaving the European Union on the basis that the single currency is underpricing the possibility of a “Brexit.”

Analysts at the bank cite the record gap between implied pound and euro volatility as evidence. Sterling has tumbled 2.2 percent this year as the June 23 referendum looms, while the euro has risen more than 4 percent.

The BofA note comes after managers at the bank were told to sidestep controversy by avoiding the term “Brexit,” according to a report in the Financial Times.

“‘Brexit’-related uncertainty and risks will not only affect the U.K., it will also affect the euro zone,” analysts including head of Group-of-10 currency strategy Athanasios Vamvakidis wrote in the note. “The euro is underpricing the potential economic disruption related to ‘Brexit,’ and shorting euro-dollar is a cheaper way than shorting pound-dollar to hedge for such a possibility.”

The pound rose 0.2 percent to $1.4414 as of 4:07 p.m. London time, while the euro gained 0.5 percent to $1.1342. BofA analysts see the shared currency falling to parity with the dollar by year-end.

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