Renewing the CNY short

Tomorrow my CNH short option will expire – worthless.

I bought it two years ago when implied vols were around 5 percent. Three weeks ago I already renewed my commitment and had to pay 10 percent. Thus, my greed for not paying up for one more year has cost me money. I should have known that the Chinese will try very, very hard to save face and only devalue when the cost of that will be unbearable. I had been told many times that this is an important element of Chinese culture.

Lesson learned!

I still think that the CNH puts are cheap :

  • the Renmimbi spot is way overvalued
  • 10 percent is still a low vol compared to what is typical for EM.

The absence of historical volatility doesn’t mean there is no uncertainty. On the contrary, history tells us that there might be a negative relationship between historic vol and future vol. This is the forest fire analogy Mark Spitznagel uses and which I find enlightening.

Because of that, I am also looking for ways to short the Saudi Rial…


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