Mexican peso/U.S. dollar implied volatility climbed steadily last week after the Mexican financial authorities lowered interest rates and the peso weakened. One-month implied vol rose to 9.5% Thursday from 6.25% at the start of the week as profit takers bought at-the-money forward straddles.
A foreign exchange options trader in New York said at-the-money calls were the place to be as players anticipated volatility would rise. A typical trade was to buy both a peso put and a call at an at-the-money forward strike price of MXP9.25 when spot was trading at MXP9.20, he said. The peso depreciated from MXP9 to MXP9.40 against the dollar last week.
James Kennan, v.p. currency options trader at BNP Paribas in New York, said a lot of the peso selling was linked to proprietary accounts taking profit on trades. In addition, the weakening of the peso could also be attributed to Mexican president Vincente Fox's difficulties with passing reforms.
