The net exposure of Leveraged Funds to the value of the Euro fluctuates between positive and negative, indicating that there is a wide array of strategies and viewpoints making up this segment, with each viewpoint bringing additional pricing information to the market.
While CFTC data doesn’t show specific strategies or outline reasons behind this increased exposure, recent analysis from Risk.net suggests some challenges inherent in the over-the-counter market for options. These include frictions and uncertainty around the OTC option exercise process and the absence of reliable netting in the system.
In contrast, CME Group’s FX options contracts are structured to ensure an automatic and guaranteed exercise of in-the-money positions, alongside a rapid and standardized flow of information to all parties. Furthermore, portfolio netting is at the core of the futures and options clearing model. This condenses and centralises exposure, greatly improving operational efficiency compared to the over-the-counter experience. A recent piece of analysis highlighted this, as well margin savings in excess of 80% for hedge funds using options on futures.
These features could explain the growth in the use of CME Group’s FX options by hedge funds, though market volatility likely also played a role and will remain a key area to monitor moving forward.
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