- - - 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."
The information and comments provided herein under no circumstances are to be considered an offer or solicitation to invest and nothing herein should be construed as investment advice. The information provided is believed to be accurate at the date the information is produced.
By Adam Jepsen, 20 June 2016