July 18, 2017
1 minute read
Unless you’ve been living under a rock, you heard that the Bank of Canada (BoC) raised interest rates for the first time in 7 years last week. The overnight rate target was adjusted to 0.75 percent, an increase of 0.25 percent (from 0.5 percent). Citing the statement release from the BoC, «recent data have bolstered the Bank’s confidence in its outlook for above-potential growth in the economy». Following this decision, the Canadian dollar soared 1.77% to 78.78 cents U.S., its highest level since August 2016.
Obviously, opportunities in the options market emerged from this situation, more specifically in the currency options market. An increase in the Canadian dollar translated into a falling U.S./CAD exchange rate, the underlying of USX options. Therefore, if an investor would have wanted to position themselves to profit from a raising loonie prior to the BoC statement, on July 10th, they could have purchased an at-the-money put option for 1.56$. The day following the central bank’s decision, the option buyer could have sold back their put option at the bid price of 2.77$ and cash in a 77.56% return.
Additional movements in the Canadian dollar are expected in the short and long-term, so you can review the specifications of the USX and explore the strategies that can be used to express specific views on the US/CAD rate.