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Dollar Risk Reversals Dominate FX Options

Dollar-denominated risk reversals have dominated the foreign-exchange options market throughout the last four weeks and traders have seen volumes increase even more in the last two weeks. One trader said he had seen four to five yards of risk reversals in euro/dollar and dollar/Swiss combined go through the market each week for the past month, compared with a more typical one to two yards. Another trader said he saw three to four times typical levels for euro/dollar and dollar/yen, but would not give a base volume. Investors bought dollar puts against the euro, yen and Swiss franc as the dollar weakened against the three currencies. The typical sizes of the individual trades is USD30-100 million.

One-month dollar/yen volatility rose to 12.5% Thursday from 11.25% a week ago. Most of the buying was from Japanese corporates at strikes of JPY113-115, intensifying from Wednesday to Thursday as spot traded from JPY119 to JPY117.25. The Japanese corporates were putting on the trades because they have a large number of assets tied up in dollars.

Meanwhile, hedge funds piled into the risk reversal trade as well, buying dollar calls against the euro at strikes from par to USD1.10 when spot was trading at or above USD0.97 last week. The cost of the risk reversal rose to 1.2 vol Tuesday from 0.85 vol Monday.

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