(Bloomberg) -- BlackRock Inc. is all set to profit should the pound surge. Or sink.
The world's largest money manager is convinced sterling's next big move is just around the corner as Brexit negotiations come to a head, but which way it will swing hinges entirely on the end result. As a one-sided bet could just as well backfire as it may profit, BlackRock has bought itself an option straddle, a strategy that profits on a sharp shift either way in the pound-dollar pair.
The biggest challenge faced by investors is the possibility of the U.K. and the European Union failing to secure a Brexit transition deal and decisions at next week's EU summit could be pivotal, according to Scott Thiel, deputy chief investment officer for fundamental fixed income. Sterling has stayed near $1.40 since early February and is little changed versus the euro over the past six months, but that suggests the market is underpricing the risks, he said.
“The pound's recent stability suggests to me that the the market isn't really fully pricing in a really negative outcome,” Thiel said during an interview in London. “The biggest risk is Brexit, for sure.”
Assuming a six-month straddle, which also covers the next four Bank of England meetings, is initiated at around $1.40, an investor would pay 50,000 pounds ($70,000) for a contract worth 1 million pounds. The strategy will break even if sterling moves to either $1.34 or $1.48, according to Bloomberg calculations. A straddle involves buying a call option and a put on the same underlying asset with the same strike price and expiry.
Brexit Deadlock
The pound rose 0.2 percent to $1.3960 in London on Thursday. Against the euro, the U.K. currency was at 88.30 pence.
The issue of the Irish border is the main obstacle preventing a transitional Brexit deal to be put in place for when Britain leaves the EU in just over a year's time. U.K. Prime Minister Theresa May has ruled out the possibility of entering a customs union with the world's largest trade bloc, which has stuck to its proposal to keep Northern Ireland in the customs union and parts of the single market.
“I'm unsure what the political fix is going to be to get us into a transition period,” Thiel said. “I see the two positions very far apart from each other.”
To contact the reporter on this story: John Ainger in London at jainger@bloomberg.net.
To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Anil Varma
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