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Derivatives

Vol Circles As Euro Reaches Parity Then Falls

The cost of euro/dollar options slid to 9% last Wednesday, down from a high of 9.5% on Tuesday morning, but up from 8% the previous week. After the euro achieved parity with the greenback on Oct.31-Nov. 1, one-month implied volatility rose, noted one trader. The currency pair traded at USD0.996 last Wednesday, down from USD1.004 the day before and up from USD0.98 the preceding Wednesday.

Most trades have been in short-dated contracts with firms cleaning their books before the holiday season accounting for most of the trades, said the trader. Risk reversals, buying euro calls and selling euro puts, dominated trading activity.

Most activity in the last few weeks has come from commodity trading advisors, with little real money being traded, noted T.J. Marta, currency analyst at Citibank in New York. A rumor about a large exotic option with a trigger at USD1.005 appears to be acting as a magnet pulling the euro higher, he noted. However, the euro looks to have peaked and is likely to be heading south. Interest rates are as against the dollar as they are going to be in the medium term and barring any unexpected developments there doesn't seem to be anything to stop a continuing equity rally, he added.

EUR/USD Spot & One-Month Implied Volatility

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