BNP Paribas is recommending clients buy euro puts/yen calls to participate in a possible yen rally caused by the repatriation of funds by Japanese financial institutions. Karim Wilkins, foreign exchange options strategist in London, said the strategy is plain vanilla because implied volatility is low at the moment. "Super-partial-rinky-dinky-treble-knock-out options are not always the best way forward," he quipped.
Hans Redeker, head of foreign exchange strategy at BNP, expects the yen to strengthen against the single currency as Japanese financial institutions sell euros to shore up balance sheets ahead of half-year results. In the last three weeks approximately JPY7.5 trillion (USD63 billion) has been repatriated and Redeker expects this will increase in the coming weeks. The bank's three-month forecast for the currency pair is JPY108.
In the trade, the investor buys a one-month euro put/yen call struck at JPY108.50. When spot was trading at JPY110.4 last Wednesday this would have cost the investor approximately 0.71% of the euro notional size of the trade. This compares to 1.48% of the notional for an at-the-money strike. Wilkins has made an allowance for exotic junkies by suggesting they part finance the trade by selling half the notional value of the euro puts in JPY111.5 euro calls/yen puts with a knock-out at JPY108.5. This would reduce the value of the trade by 55bps.
