As elsewhere, in the Asian fx derivatives market the previous 12 months could be summarized by two words: "low vol," and a concomitant increase in the use of plain-vanilla instruments, according to Louis Cucciniello, head of options at J.P. Morgan in Singapore. With vol lower across the board, vanilla options offered a strategy with a lower-than-usual cost to express directional views, he explained. And unlike structured derivatives, users of vanilla options did not cap their upside participation.
Peter Redward, Asian currency strategist at Deutsche Bank in Singapore, sees this as part of "a trend toward vanilla-ization," adding that historically the most popular products are the simplest.
Despite two events that reversed the low vol trend--the Sept. 11 terrorist attacks and hedge funds purchasing a large numbers of U.S. dollar calls/yen puts early in the year--the fundamental trend of low volatility had reasserted itself by mid September (DW, 9/17), according to Ron Leven, currency strategist at Lehman Brothers in Tokyo. "Volatility selling has accentuated the compression of volatility," he noted. J.P. Morgan's Cucciniello predicts an uptick in volatility in around six months as it is now bottoming out: "This will occur in all the major currencies but especially in Asia," he noted.
