The imminent expiry of massive foreign exchange barrier option positions could cause the dollar to weaken against the euro to levels over USD1.07. The State Administration of Foreign Exchange (SAFE), which oversees foreign exchange reserves for the People's Bank Of China, was rumored to be long at least USD5 billion in range trades that it was hedging as they neared expiry, which was keeping the euro below USD1.06, said traders and salesmen. One trader, however, speculated that trades were more likely to be euro calls with reverse knock outs because about a month ago when the trades would have been put on, a barrier trade would have cost more than a call with a reverse knock out. SAFE is a major player in the fx options market and uses the products to hedge its cash reserves, traders explained. One trader said, because SAFE has entered barrier trades in the past, it is often the subject of rumors about such trades. Officials at SAFE declined comment.
Several traders speculated the options would be three-week double-no-touch options with barriers at USD1.01 and USD1.06 and executed when euro/dollar was trading at USD1.03. And an example of a reverse knock out would be a euro call/dollar put struck at USD1.02 with a reverse knock out at USD1.06 or 1.062. "[Hedging these positions] can hold up the dollar on a daily basis, but the down trend remains intact," said James Fauset, v.p. in foreign exchange at Bear Stearns in London. He added that he is looking for the dollar to continue to weaken.
