Mexican peso/U.S. dollar implied volatility rocketed last week as currency options traders used the Mexican unit as a proxy for the Brazilian real and the Argentinean peso after the credit market forced the Argentine government to pay 14 interest on three-month paper in a bond auction last Tuesday. The move underscored a collapse in confidence in the Argentine peso's peg to the dollar.
Traders said one-month implied vol in the Brazilian real shot up to 27% Thursday from 21% the week before as the currency sold off in the spot market to BRL2.57 from BRL2.41. But a lack of liquidity in the pairing led traders to use Mexican peso as a proxy. On the back of the move Mexican peso one-month implied vol jumped to 13% Thursday from 9% the previous week as the currency fell in the spot market to MXP9.35 from MXP9.08.
James Kennan, v.p. currency options trader at BNP Paribas in New York, said foreign based traders use the Mexican peso as a proxy because it is the only Latin American currency that is fully deliverable and could be affected by an Argentinean default.
Proprietary desks were scrambling to buy vol with the most popular trades being short-term straddles. These were popular because in crisis situations liquidity only remains in the at-the-money options and at the short-end of the curve. One trader predicted USD600 million (notional) went through the market Thursday, which is equal to the total volume in an average week.
MXP/USD Spot & One-Month Implied Volatility
