Dynamic hedging strategies in Turkish lira

Background: As most of the major crosses range-traded this year, and we heard increasing talk about EU accession for a number of eastern European countries, many institutional customers chose to switch their focus and instead sought value in emerging market currency option trades. Their motive is simple and obvious.

Options on emerging market currencies are often characterised by extreme differences in implied volatility (the 6-month EUR/CZK trades around 5% compared with 16% on USD/TRL)

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