The Bank of Japan’s (BoJ) recent hawkish shift in monetary policy has resulted in a flurry of foreign exchange options trades, as the market looked for protection against downward moves in the dollar/yen spot rate.
The rate fell from 136.91 at close on December 19 to 132.331 the following day, after the announcement that the central bank would adjust its long-standing yield curve control measure – an indication that a rate rise might be on its way.
Foreign exchange options dealers say the sharp move lower drove significant demand for downside risk through USD/JPY options from both hedge funds and corporates.
“We’ve seen closing of previous positions, re-hedging, and new positioning, mostly focused on acquiring downside either by selling calls versus risk reversals or just buying outright downside. We have definitely seen and traded a very sharp increase in volume,” says Francesco Schiavo, global head of…