Volumes in euro/Hungarian forint options rocketed by three to six times as investors jumped into convergence trades in the last two weeks. Traders said approximately EUR250 million (USD250 million) of these trades were executed every day in comparison to EUR50-100 million on average. The trades were sparked off when JPMorgan reportedly bought about USD500 million (notional) in 10-delta euro put/forint calls.
The trades caused euro/forint implied volatility to spike to 9% from 7% earlier in the week. In a typical trade investors bought forint calls/euro puts struck around HUF230 when spot was trading around HUF237.5.
The trades preceded a 50 basis point interest rate cut on Tuesday to bring rates down to 9%. The central bank wants the forint to appreciate so that it can cut rates, which is essential for entry into the eurozone, without letting inflation increase. However investors still accumulated the positions after the cut because of anticipation of further currency appreciation.
Investors lose on the trade if there is a delay in convergence or Hungary does not satisfy the stability pact's criteria, a trader explained.
