The cost to hedge against volatility in dollar-yen over the coming week has risen to the highest level in almost three years as traders brace for any more Bank of Japan surprises on Wednesday.
(Bloomberg) — The cost to hedge against volatility in dollar-yen over the coming week has risen to the highest level in almost three years as traders brace for any more Bank of Japan surprises on Wednesday.
By raising the cost of the contracts, option sellers are trying to reduce the expense of being caught off guard again after the BOJ shocked investors last month by adjusting its yield-curve control program. That sparked the yen’s biggest one-day rise against the dollar since 1998.Â
The day before the December policy meeting option markets had priced in a 0% probability of the currency pair touching 130.58 on the day of the decision but that level ended up being the session’s intraday low.Â
A combination last week of the Yomiuri newspaper reporting that the BOJ will review the side effects of its ultra-easy monetary policy and the central bank’s 0.5% yield cap being breached have spurred option sellers to raise the cost of the contracts.Â
They’re factoring in the potential of dollar-yen tumbling if policy is further changed or rallying should the BOJ stand pat, which may prompt short covering by investors betting on a policy tweak. One-week dollar-yen option contracts are now pricing in a 70% chance that spot will trade in a 123.40-131.76 range over a one-week period based on a reference rate of 127.67.
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