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Derivatives

Anxiety Over Dollar Fuels Yen Call Buying

Fears of a weakening dollar coupled with a plummeting Nikkei 225 continued to fuel a yen call buying spree last week. One-month Japanese yen/U.S. dollar implied volatility rose to 10.5% last Thursday from 9.75% a week earlier as demand for yen calls/dollar puts remained high. Japanese investment banks, corporations and life insurance companies were the most active buyers of the one-week yen calls/dollar puts. The one-month risk reversal also moved more in favor of yen calls as a result of option buying. In a typical trade players purchased yen calls/dollar puts struck around JPY117 when spot was trading around JPY120. Traders say that if the Nikkei continues to fall the trend of buying yen calls will continue because investors would look to move their assets into safer cash products.

Traders attributed the ongoing spark in yen calls in part to Japanese investors looking to capitalize on the uncertainty over U.S. policy makers commitment to a strong dollar by selling dollars and buying yen. Andrew Chaveriate, technical analyst at BNP Paribas in New York, predicted more volatility in the dollar over the next month as global activity slowly picks up after the summer vacation and the Japanese market comes to the end of its semi-fiscal year. Chaveriate, however, remains bullish on the dollar over the next three months contending that as the holiday weekend comes to a close and market makers return from vacation the dollar will begin to stabilize and regain its strength.

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