Speculative funds purchased euro calls last week as the euro rallied against the greenback to its highest levels of the year, according to foreign exchange options traders in Europe. Nazim Mahrour, foreign exchange options trader at Société Générale in Paris, said U.S.-based hedge funds were the main source of demand for the options. The euro appreciated to USD0.903 Thursday from USD0.89 the week before and one-month implied volatility jumped to 8.7% from 7.6%.
One of the largest trades executed was a three-month euro call with a strike at USD0.91, said Mahrour. He estimated between USD500 million and USD1 billion was traded with millions more in similar trades.
The trades and the movement in spot pushed implied volatility higher, according to Paul Mackel, currency strategist at Dresdner Kleinwort Wasserstein in London. Concerns about the Middle East, the pace of recovery and the lack of assertion on the strong dollar policy by Paul O'Neill, secretary of the U.S. Treasury, all contributed to the dollars weakness, said Mackel.
