Citigroup bought USD500 million to USD1 billion (notional) in one-year dollar calls/yen puts struck at JPY135 at the beginning of last week. One-year volatility only jumped to 10.5% from 10.4% as the trades went through first in Asia and then Europe. The Street is bearish on the dollar, so there was a ready supply of options sellers, traders said. Spot was trading at JPY120.43 Tuesday. Steven Reiter, head of fx options at Citigroup in London, did not return calls.
Traders said it was not clear why Citibank executed the trade. Several speculated it was a punt on press reports that the Japanese government will replace Haruhiko Kuroda, vice minister of finance, and that in the past, new officials have intervened in dollar/yen exchange rates soon after they have taken office. Another trader, however, said the trade was taking more of a fundamental view on the fact that the yen is overvalued. Since Japan is dependent on technology exports, slack global demand should weaken the currency, he said.
The trade is long-dated so it is not affecting flows, but traders said in six to nine months Citibank could unwind the position. "It's something to watch," a trader said.
