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By Anirban Nag
LONDON, July 21 Investors sought protection on
Monday against the possibility of a Scottish vote for secession
in nine weeks time after months of apparent confidence the
307-year old union with England will survive.
Until Monday, currency investors had not priced in the
chance of a Scottish vote for independence, either by reducing
sterling exposure or by hedging against future turmoil.
Scottish independence was at best a slight risk for most
money managers, with opinion polls still showing more than 50
percent of Scots want to remain as part of the UK - far more
than the third who want independence.
In fact, the pound has gained 3.5 percent against the dollar
in the past six months to around $1.72 as investors
focused primarily on the prospect of higher UK interest rates as
a recovery gains traction.
But some investors started to buy options on Monday that
allow them to hedge against the possibility of a Scottish vote
for independence. This trend is likely to pick up in coming
weeks, analysts said.
The two-month implied vol, which captures the
Sept. 18 vote and the results, rose to around 5.2 percent from
below 5 percent on Friday and 4.6 percent just a week ago.
Sterling two-month risk reversals, which
gauge demand for options on a currency rising or falling, also
showed a greater bias for sterling weakness than did their
"There is hedging against a surprise vote in the Scottish
referendum and the two-month implied vols are suggesting that,"
said Peter Kinsella, currency strategist at Commerzbank.
"Hedging against an outside chance of a split is pretty cheap."
Uncertainties include which currency an independent Scotland
would use, membership of the European Union and whether the
Scottish fund industry would move south, they said.
"The Scottish vote is starting to get factored in,
especially given that August is a time when many people go away
on holidays," said Ian Gunner, portfolio manager at Altana Hard
Currency Fund. "The pound can be vulnerable to a shakeout."
(Additional reporting by Jemima Kelly,; editing by Nigel