You Already Have An Inherent Trade on EU Referendum

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You Already Have An Inherent Trade on EU Referendum

You Already Have An Inherent Trade on EU Referendum

The Market and Political View from Adam Jepsen, Founder, Financial Spreads.

- - - The Shorter View - - -

From a 'pure risk' point of view, the unknown consequences of leaving the EU mean that many of us already have an inherent position on the outcome of the referendum.

According to the bookies there is a 30-35% chance the UK will vote to leave the EU. The polls have it a lot closer than that.

If the UK does leave the EU then there is a chance that the doomsayers may, to a degree, be correct about the downside of leaving the EU.

Therefore the majority of UK residents have an inherent trade on the referendum.

There's no need to add to that risk by trading this week.

Investors could try to hedge the possible downside but there's a real possibility of some extreme volatility and that makes hedging difficult.

- - - The Longer View - - -

Financial Spreads, the UK spread betting and CFD trading company, has written to clients reminding them of another reason of why they might not want to trade the referendum.

According to Adam Jepsen, the founder of Financial Spreads, "It is important to remember that from a 'pure risk' point of view, most of us have an inherent trade on the referendum."

"Irrespective of our personals, there is a financial risk."

Financial Spreads, has already written to clients warning them of the difficulty of trading the potentially extreme volatility.

The company has also temporarily increased margins, i.e. increased the funds that clients need to deposit in order to trade.

- - - Inherent Trade on EU Referendum - - -

Jepsen explained the risk, "In very simplistic terms, the bookmakers suggest there is a 70% chance the UK will 'Remain' and a 35% chance that the UK will 'Leave'. (The extra 5% is the bookmakers' profit margin).

"The UK leaving the EU may not result in Great Depression II that George Osborne has forecast. Having said that, there are many predicting a prolonged downturn if the UK does vote to Leave.

"If, for the sake of argument, there's a 35% chance the UK will Leave and a 30% chance of the doomsayers being correct then there's currently a 10% of a prolonged downturn".

"That's a big percentage and an inherent trade.

"In a way, it doesn't matter if there's a 10%, 30% or 50% chance of the doomsayers being correct.

"What we are tying to remind investors is that there is a risk of:

"a) The UK voting to leave, and

"b) The doomsayers being, to a degree, correct.

Therefore there is a risk on the table.

"This is another reason why I won't be trading the Referendum."

- - - Hedging the Referendum Might Not Work Either - - -

According to Jepsen it would be difficult to hedge the potential downside.

"I am an advocate of hedging but hedging this risk is particularly tricky:

"a) It's largely impossible to predict the chance and scale of a prolonged downturn

"b) The markets could be incredibly volatile over the next few weeks. If an investor put on a trade to hedge the downside it's possible that the hedge would closed out due to the extreme volatility. Therefore the hedge could lose and the investor could also lose due to the impact of a downturn."

By Adam Jepsen, 20 June 2016

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