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Euro/Dollar Vols Spike After Rally In Spot

27 Oct 2003

One-month euro/dollar implied volatility recovered to 11.5% from earlier lows of 10.5% last week following the surprise strengthening of the euro against the dollar on Wednesday . In the spot market the euro strengthened to USD1.1810 from USD1.1650 earlier in the week. This was accompanied by a sharp sell off in short-dated euro calls with strikes at USD1.15/1.16 at the beginning of the week, according to a London-based trader.

Traders said the one-week to one-month end of the market was dominated by a large exotic trade, probably a euro call struck at USD1.16-1.17 with a knock-out at USD1.20.

One-month 25-delta risk reversals have risen to 0.60% in favor of euro calls after sinking as low as 0.40% earlier in the week. The risk reversal was 0.90% in favor of euro calls when the euro reached USD1.18 in the spot market earlier this month. For investors who believe the euro could go higher than USD1.18, now is a good time to buy calls since they are cheaper than two weeks ago, said Giovanni Pillitteri , v.p. in foreign exchange options trading at Deutsche Bank in London.

The sudden weakening of the dollar against the euro could not be explained by the release of data on the U.S. economy as no significant data was released last week, noted Mark Austin , head of foreign exchange research at HSBC in London. Recent U.S. economic data has been strong, he added. Austin said a sell-off in U.S. equities on Wednesday prompted investors to dump the dollar.

EUR/USD Spot One-Month Implied Volatility

27 Oct 2003