A European bank last Wednesday purchased a one-touch dollar/yen option that pays out USD20 million if the spot rate hits JPY170 in the next 12 months. One trader at a U.S. bank in London said this was the largest barrier option to trade in the last five years. Spot dollar/yen was trading close to JPY120 and 12-month implied volatility was at 13% when the deep out-of-the-money one-touch traded through the broker market.
The bank that bought the option, which could not be identified by press time, paid USD800,000 in premium, according to currency option traders. Although the option is practically worthless at the current spot rate and implied vol levels, several traders said if spot hits JPY130 or 12-month implied vol reaches 30% the option will jump in value.
The strategy may not be as aggressive as it first appears because the yen is widely expected to slump against the U.S. dollar. Ian Stannard, foreign exchange strategist atBNP Paribas in London, forecasts dollar/yen will hit JPY140 in the third quarter. Yield-hungry foreign investors will continue to pull their money out of Japan, he predicted, noting that last week was the first time this year there has been a net outflow of capital from Japan.
--J.C.
