JPY volatility successfully quashed, options show
July 12 (Reuters) -The price action in FX options since Thursday's U.S. CPI data reinforces expectations of official intervention, but also reflects its success in quashing related volatility and JPY weakness, at least for now.
The FX volatility upon which FX options thrive is an unknown, but key part, of their premium, so dealers use implied volatility as a stand-in. Implied volatility movements can therefore become a barometer for actual and perceived FX risks.
Very short-dated implied volatility reacts the most to realised FX volatility. The big jump for one-week USD/JPY implied volatility from 7.5 to 11.0 and benchmark one-month from 8.5 to 9.75 post-CPI matched price action seen amid prior interventions and sudden and significant spot losses.
There was also a big increase in the implied volatility premium JPY calls over puts, options that give holders the right to buy JPY versus sell it, as shown via option risk reversals contracts. The benchmark one-month 25 delta risk reversals have doubled their downside strike premium and keep it around 1.4 to highlight the simmering risk of further intervention.
USD/JPY is more settled on Friday and implied volatility has quickly reverted, with longer-dated expiry contracts actually lower than they were before Thursday's JPY gains. This price action is typical in a post intervention scenario, where a period of FX consolidation is expected and shows that the intervention has served its purpose, at least in the short term.
For more click on FXBUZ
USD/JPY FXO implied volatility https://tmsnrt.rs/4cAoKrT
USD/JPY 1-month expiry FXO 25 delta risk reversals https://tmsnrt.rs/4cUTNy5
(Richard Pace is a Reuters market analyst. The views expressed are his own)
</body></html>Related Assets
Latest News
Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.
All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.
Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.
