Lehman Brothers and Bear Stearns are pitching low or no-cost foreign exchange structures to speculative investors who expect a rally in the euro, as volatility remains near record lows and makes long-term punts more attractive. One-year euro/U.S. dollar implied volatility was 9.8% Wednesday, its lowest level since September 1999. Volatility is low because euro/dollar is rangebound and the capital flows out of the eurozone have subsided.
Bear Stearns is recommending investors sell one-year euro puts/dollar calls struck at USD0.84 with a reverse knock-in at USD0.79 and buy euro calls struck at USD0.88. The option is zero-cost, said James Fauset, fx options salesman in London. "We just don't think the euro will get down there [to USD0.79], from a historical perspective we always see people who can be euro bears and still buy the euro at USD0.85," he said. Spot was at USD0.8635 Wednesday. The trade plays on the firm's view that the euro is fundamentally undervalued against the dollar.
Lehman Brothers is recommending a similar trade for euro bulls, albeit in a vanilla structure. It's suggesting clients buy one-year euro calls/dollar puts struck at USD0.8850. The option is zero-cost unless spot moves to or below USD0.82, in which case the notional of the position doubles and the investor pays 2.5% of the notional as a premium, said Cameron Millar, global head of fx options in London. The euro's lowest-ever rate is USD0.8230.
