One-month U.S. dollar/Brazilian real implied volatility surged last week to 14%/17% from about 11%/14% after the resignation of Argentina's minister of economy and the appointment of a new minister. Speculators and hedgers bought dollar calls/real puts, typically in one- to three- month maturities and struck at-the-money or slightly out-of-the money, according to Anshu Goyal, v.p., Latin American foreign exchange options and forwards trader at Lehman Brothers in New York.
The real averaged around BRL2.16 on the spot market last week. Speculators and hedgers were concerned that the uncertainty surrounding the Argentinian economy would create a spillover in Brazil, which might further increase volatility on the real, said Goyal. Brazil's economy is closely intertwined with Argentina's. If investors make the flight to quality, buying dollar calls makes sense, he added.
