Israel-Iran conflict impact on FX Options volatility

The Israel-Iran conflict materially increased geopolitical uncertainty across the region – with direct implications for valuations and currency risk management.

“Last week we saw heightened volatility in regional FX pairs such as USD/ILS, driven by shifting investor sentiment and rising hedging costs. The pseudo-benchmark 1 month at-the-money volatility immediately spiked by over 1.5% on the news of the first airstrikes. While that contract’s volatility retrenched to lower levels by the end of the week, the 12% vol level by midday June 18th was still 1.85% higher than at the start of the prior week, on June 9th.” John Crisp, Head of FX Data Product & Strategy.

While USD/ILS saw a marked increase in short term volatilities, EUR/USD and other major currencies did not see such significant changes, either in at-the-money volatilities or risk reversal strategies (a measure of asymmetry in potential FX movements in the future).

Update on 25th June as of 9am UTC time 24th June:

USD/ILS 1M ATM: levels since last week have remained above 11.0% and currently 11.15%.
EUR/USD 1M ATM: since last week has remained range bound between 7.5% and 8.7%, currently 7.8%.

Episodes of volatility like this underscore the need to integrate geopolitical risk into real-time monitoring and scenario planning frameworks.

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