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Derivatives

Positive News For Turkey Sparks Options Selling

Options on the U.S. dollar and Turkish Lira currency pair sold off across the one- to three- month portion of the curve last week, following the publication of the European Union's report into Turkey's accession to the union.

Options on the U.S. dollar and Turkish Lira currency pair sold off across the one- to three- month portion of the curve last week, following the publication of the European Union's report into Turkey's accession to the union. The report, released on Tuesday, was broadly positive and in-line with market expectations. Traders said the selloff was triggered by players punting on short-term stability following the report. One-month implied volatility fell to 11.5% after the report was published from 14.5%. In the spot market, the pair was trading at TRL1,502,717.27 on Thursday.

"It's been a basic bludgeoning of volatility," said one trader at a U.S. house. Market players were keen to sell options with a range of strikes, explained the trader, because the strike is less important than the overall direction of the dollar in this case. "People just want to be better positioned for a quiet market," said another trader. The premiums from selling options made this a better strategy than trading in the spot market, he noted. The market in Turkish lire options is one of the most mature of the emerging markets and most houses now trade the currency, said traders.

Elizabeth Gruié, foreign exchange strategist at BNP Paribas in London, said, "The report was a non-event for the currency pair in the spot market, it was exactly as expected." Gruié noted the outcome of negotiations between Turkey and the International Monetary Fund will be one factor driving the lire in the longer term.

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