Foreign exchange traders were last week piling into the market to hedge short exposure to a USD2 billion (notional) one-month dollar call struck at USD121.30 that matures Thursday. The buyer of the call, believed to be Goldman Sachs, wins if spot trades past the strike. This looked increasingly likely Friday as the yen swooned to USD120.70, leading banks to firm up their hedges. Officials at Goldman Sachs declined comment.
Interestingly, traders with short exposure to the option would normally sell options to delta-hedge their position but since implied volatility is so low they are instead purchasing dollars on dips and selling on rallies in the spot market. Dollar/yen one-month implied vol was at 9.40% Friday, down significantly from 10.90% the previous week.
