Pricing Geopolitical Risk in Markets
How equity, credit, FX, and oil markets actually price geopolitical risk — and what the implied probabilities look like in practice
On the morning of Monday September 16, 2019 — the first U.S. trading day after the September 14 attacks on Saudi Arabia's Abqaiq oil processing facility and Khurais oil field worked in lesson l7 — Brent crude futures opened approximately 19% higher than Friday's close, and settled the day approximately 14.
6% higher (the largest one-day move in Brent since Iraq's 1990 invasion of Kuwait). WTI crude futures opened similarly higher and settled approximately 14.7% up.
Equity markets opened modestly lower. The spot dollar index gained modestly. The VIX (CBOE Volatility Index, the standard measure of S&P 500 equity option-implied volatility 30 days forward) jumped from approximately 13.
7 at Friday's close to approximately 15.3 at Monday's close — a meaningful but not extreme move. Saudi sovereign credit default swap (CDS) spreads widened modestly.
By the end of October 2019, after Saudi authorities had reported substantial production restoration, Brent had largely retraced the post-attack spike.
That is the opening. Finishing a lesson is where it stops being interesting and starts being useful: the full lesson runs to 7 sections and ends with 6 practice questions. A free account is what opens the rest, and the other 255 lessons in the Academy with it. No card.
What this lesson covers
- 1Implied probabilities — what option prices actually tell you
- 2Why geopolitical risk pricing is often non-linear and asymmetric
- 3Reading sovereign CDS spreads — what they actually price
- 4Geopolitical risk pricing across markets — what each signal actually tells you
- 5September 14-October 31, 2019 — Abqaiq attack price action across markets
- 6Where to see this on the platform
- 7Summary