Options Barrier Falls As Euro Appreciates
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Derivatives

Options Barrier Falls As Euro Appreciates

Foreign exchange traders saw the euro/dollar spot rate crash through options barriers last week as the single currency carried on strengthening through the USD1.30 mark.

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Foreign exchange traders saw the euro/dollar spot rate crash through options barriers last week as the single currency carried on strengthening through the USD1.30 mark. After initially stalling just before USD1.30 on Tuesday, the euro reached USD1.3040 on Wednesday leading to a bullish buying of call spreads, according to James Kamphoefner, an fx options specialist with Banc of America Securities in San Francisco.

"The first impulse on a day like [Wednesday] is to deal with the problems you have," said Kamphoefner, explaining that when things really move, one and two day options are most commonly traded. But those seeking to position themselves have sought options with a two-week, one-month and two-month maturity.

Hedge funds have been the most active players and corporate hedgers who have been coming in long euros and buying puts. It's bringing corporate hedgers out of the woodwork, according to Kamphoefner.

"The fact that we have broken this barrier has stirred things up, but the true actual volatility of the euro is not yet keeping up," he added. The one month actual volatility stands at a little over 8%, he said, and implied volatility is well above that, which he put at 9.35% in one month, up from extremely depressed levels Tuesday when it was trading near 8%.

"Certainly breaking USD1.30 is important," Kamphoefner said, adding that multiple factors have driven this activity such as U.S. Treasury Secretary John Snow's failure to convince investors the Treasury has a strong dollar policy during a speech on Wednesday. "The trend and fear has been for a weak dollar and there has been no comfort to put a stop to that," Kamphoefner said. He thinks the euro's break though USD1.30 has left room for further upward movement. "The near to mid-term upside should be somewhere above here," he said. "How far that goes, I really don't know."

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