Deutsche Bank executed USD2 billion (notional) in U.S. dollar/yen straddles Wednesday, causing one-month implied volatility to rise to 9.9% from 9.4%. In the trade, Deutsche Bank bought one-month at-the-money straddles, in which it purchased dollar calls/yen puts and sold dollar puts/yen calls, according to a trader at Deutsche Bank. Traders said spot was trading at JPY121 when the trade went through the market.
"We think vols are cheap at this level," the official said, explaining why the firm put on the directionally neutral, long vol trade.
Several rival traders speculated that the straddle was a smokescreen to disguise a simultaneous directional position in dollar/yen. Others speculated that Deutsche Bank needed to buy vol to hedge a short vol position arising from selling dollar calls/yen puts to a hedge fund client. The greenback rallied to JPY121.30 from JPY121 as soon as Deutsche Bank executed the straddle. One trader said the firm bought USD500 million in U.S. dollars in the cash market Wednesday, which was likely to be a hedge for the dollar calls it sold. A cash purchase of this size would have moved the market because trading was thin that day. A senior fx official at Deutsche Bank had no comment on speculation about the reason for the trade.
