MARKET HEADLINES
Yen call options in demand as speculators hedge their bets
The yen's slide to seven-year lows against the dollar could have more room to run, but in the shorter term, investors are using options to hedge against a sudden rebound in the yen. The yen has weakened after the Bank of Japan's massive easing on Oct. 31, hitting a fresh nadir of 116.20 yen on Friday, its lowest since October 2007. But the currency options market has shown a different reaction, as yen calls - the right to buy the yen - are more in demand than yen puts - the right to sell. Risk reversal spreads, which gauge demand for whether investors prefer to bet on a rising or falling dollar against the yen, widened in favor of yen calls. The three-month risk reversal spread widened to
about 0.3 percentage point. It had flipped to favor yen puts just after the Bank of Japan stunned markets by expanding its quantitative easing program last month. The diverging reaction between the spot and option markets reflects hedging activity by speculators who want to bet against the yen but also want protection against a sudden rebound due to rising volatility. "People buy yen calls to hedge, not because they think the yen is on a rising trend," said Kaneo Ogino, director at Global-info Co in Tokyo, a foreign exchange research firm. One-month dollar/yen implied volatility - an indicator of how much currency movement is expected over the coming four weeks - spiked as high as 11.3 percent on Nov. 6 as traders hedged against sharp moves in the yen. It was back down to around 10.85 percent on Friday, but sharply up from levels under 5 percent as recently as August. Market volatility jumped after the BOJ's surprise easing, which was followed by this week's speculation that Japanese Prime Minister Shinzo Abe will delay a planned sales tax hike and call a snap election, which provided another source of uncertainty. Abe has said he will decide whether to proceed with the planned October 2015 tax increase after seeing preliminary figures on Japan's third-quarter growth, due on Monday.
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