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Derivatives

Risk Reversals Move Further In Favor Of Single Currency

The euro/dollar risk reversal moved further in favor of euro calls as investors snapped up volatility. Six-month 25-delta risk reversals jumped to 0.78 vol Thursday from 0.55 vol on Monday as one investor bought a USD250 million euro call/dollar put struck at USD1.13 and sold a USD250 million euro put/dollar call at USD1.0250. The trade was executed when spot was at USD1.08 at a price of 0.6 vol. A similar trade was executed later in two USD350 million legs at a vol of 0.7750. In this trade, the investor bought a euro call/dollar put struck at USD1.15 and sold a euro put/dollar call struck at USD1.

The end of the war in Iraq did not trigger a much expected rally for the dollar. This led to interest in euro calls, according to another trader. Francesca Fornasari, foreign exchange strategist at Lehman Brothers in New York, said that at the beginning of the conflict movements in euro/dollar spot were pegged to news from the war. "But as investors look more toward the medium turn, they are focusing on fundamental problems within the U.S. economy," Fornasari said.

She explained that the dollar has been penalized by low interest rates as investors search for yield. Lehman is predicting the dollar will weaken to USD1.12 in six months. With the Iraq conflict out the way, the dollar could fall because of concerns about what will happen over U.S. allegations that Syria is harboring Iraqi military and government officials.

EUR/USD Spot & Six-Month 25 Delta Reversal

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