Analysis: U.K. Interest-Rate Volatility Is Underpricing Brexit Risk

GBP swaptions are underpricing the risk of the U.K. leaving the European Union compared with currency options, as the potential manifold impact of such an event on interest-rate markets makes it more difficult to trade, Bloomberg strategist Tanvir Sandhu writes.

The term structure of GBP swaption volatility remains upward-sloping while its foreign-exchange counterpart has inverted. The spread between implied and realized volatilities on the pound has risen to record highs while a similar measure in the rates market has lagged.