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Derivatives

Rocketing Vol May Lead To Asian Fx Goldrush

Last week's surge in implied volatility across Asian currencies on the back of comments from the Group-of-Seven most industrialized countries could spark a long-term boost to volumes. "The recent moves have definitely put the Asian currency market back on more players' radar," said Lee Chee Pin, head of foreign exchange at Bank of America in Singapore.

"Implied volatility was moving around more than any time since September 11 [2001]," according to Giovanni Pillitteri, v.p. in foreign exchange options trading at Deutsche Bank in London. For example, one-month dollar/yen implied volatility jumped to 16% from 8% while one-month volatility on Korean won/U.S. dollar options rose from 7% to 10.5%.

Traders believe that the move toward stronger Asian currencies will be sustained and will lead to a boost in trading volumes. "The consensus is that regional currencies will strengthen--it's just a matter of how soon and how fast," said BofA's Lee.

Foreign exchange strategists are altering recommendations and pitching exotic options to take advantage of the changes. Crédit Agricole Indosuez had been recommending clients purchase three to nine month one-touch digital options with strikes at around JPY100-105, punting that the yen would break its JPY116 barrier, according to Derek Sammann, global head of foreign exchange options in London. This type of trade has paid out on two counts. First it has benefited from the move in spot, and second the rise in vol means options in general are more expensive. For those investors that have missed out on the move through the barrier, Sammann would recommend they buy a digital one-touch option struck at JPY95-100 with a maturity of three to six months that knocks-in at JPY115. Sammann said that he thinks dollar/yen will move lower but there will be a retracement first and vols will decrease. So the option will knock-in at JPY115 and then as the spot price moves lower, the investor will start to make money.

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