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[LONDON] As Britain ponders its future in the European Union, investors are betting an amount almost the size of Iceland's economy on the pound falling to levels last seen in the 1980s.
At least £11 billion (S$21.25 billion) has been wagered this year on options that would profit if sterling fell to or below US$1.3502, about a 4 per cent drop from current levels, after the June 23 referendum, data compiled by Bloomberg show.
More than half of the positions were placed since the date of the vote was set on Feb 20.
The figures give an indication of what's at stake as investors weigh the possibility of the UK quitting the world's largest single market, which accounts for about half its imports and exports.
Even with opinion polls showing no clear lead for either side, the prospect of a "Brexit" has seen the pound fall more than any other major currency versus the dollar this year.
"There is a risk premium in sterling, both in terms of the spot rate and in terms of the volatility market, but this is one of those events where you have no way of calibrating how big it should be," said Paul Meggyesi, a foreign-exchange strategist at JPMorgan Chase & Co in London.
"Few investors believe that sterling has fallen to levels where the risk-reward favors buying."
While tumbling to US$1.3502 would represent only the pound's decline this year, it would take the UK currency to the lowest level since 1985.
Traders assign 55 per cent odds to sterling reaching that level by the day of the referendum, according to Bloomberg's options calculator.
Mr Meggyesi sees the pound falling to US$1.38 by mid-year, from about US$1.41 on Thursday in Tokyo.
Sterling will trade little changed at the end of the second quarter, according to the median estimate in a Bloomberg survey of analysts.
Even forecasts of a drop to these levels may be optimistic if the UK actually ends up leaving the EU.
If a vote to leave resulted in a "messy" divorce from Europe, then the UK economy would likely fall into a recession and the pound would drop to about US$1.15 by the end of the year, Nick Kounis, ABN Amro Bank NV's Amsterdam-based head of macro research, wrote in a note.
In December, the Dutch lender predicted sterling's recent levels more accurately than any other lender.
Investors have stepped up weaker-pound wagers in the past month. Of the £11 billion outstanding, £6.5 billion were placed since the referendum data was set on Feb 20, data from the Depository Trust & Clearing Corp show.
And sterling's likely to have a rough ride on the way to these declines.
Implied volatility spanning the June vote jumped to an almost six-year high of 15 per cent, suggesting traders are more concerned about price swings than in the run-up to the 2015 elections or the 2014 Scottish independence referendum.
"On an actual Brexit result we will revisit some of the highs not seen since the financial crisis on volatility - we can get into the 20s," said Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd in London.
The pound may fall to as low as US$1.20 on a vote to leave, he said.
For many, there's nothing to fear from quitting Europe. London Mayor Boris Johnson told lawmakers on Wednesday that the capital's finance industry would "flourish mightily" if Britain left, and said support for staying in is "shallow" among business leaders.
An ITV Plc/ComRes opinion poll conducted March 18-20 showed 48 per cent of respondents backed remaining in the EU, with 41 per cent saying they'd vote to leave. An ICM survey on the same days showed 43 per cent support for quitting and 41 per cent wanting to remain.
Currency traders aren't taking the chance that everything will be fine after a potential UK exit.
The premium on options to sell sterling compared with those to buy more than doubled to a record on Wednesday once the measure encompassed the day of the referendum.
It jumped to 4.3 percentage points, also spurred by the Brussels terror attacks, which were seen boosting the case of anti-EU campaigners concerned migration is too high.
"We used the recent appreciation in the pound against the dollar to add to our short-sterling position," said Mark Dowding, a London-based money manager at BlueBay Asset Management LLP, which oversees US$60 billion.
He added that sterling should be trading in the high-US$1.30s. "Here and now, the probability of a leave vote is somewhat under-priced."