Dollar Volatility Rises as Banks May Remain Reluctant to Lend

By Stanley White

Sept. 22 (Bloomberg) --Volatility implied by dollar-yen options rose on speculation a U.S. government plan to buy troubled assets and central banks' efforts to increase liquidity will fail to stem a global credit crisis.

Treasury Secretary Henry Paulson sent a plan to Congress Sept. 20 that would allow the government to buy $700 billion in mortgage-related securities and other devalued assets, according to a document obtained by Bloomberg News and confirmed by a congressional aide. Central banks in Japan and Australia added $15.7 billion to the financial system today after the three- month London interbank offered rate, the cost banks charge each other for dollar loans, rose to a seven-month high on Sept. 19.

``Options market makers hesitate to sell volatility,'' said Takeharu Miki, currency options manager at Bank of Tokyo- Mitsubishi UFJ Ltd., a unit of Japan's biggest publicly listed lender. ``There's just too much event risk. There may be more problems with money-market liquidity.''

The dollar declined to 106.59 yen at 2:58 p.m. in Tokyo from 107.45 yen late in New York on Sept. 19.

Implied volatility for dollar-yen options expiring in one month rose to 16.41 percent from 16 percent at the end of last week.

The dollar's one-month 25-delta risk-reversal rate against the yen widened to minus 3.68 percent from minus 3.64 percent on Sept. 19, indicating a greater premium for dollar puts that allow sales over dollar calls that grant the right to buy.

Delta measures the rate of change in an option's value relative to moves in the underlying currencies. Dealers quote implied volatility, a measure of expectations for future currency swings, as part of pricing options.

Straddles

Dealers traded $50 million to $100 million of so-called straddles that expire in two months with an implied volatility of 15 percent and a strike price near the dollar's current level, Miki said. Holders of straddles, which are call and put options with the same strike and duration, benefit if the underlying currency moves in either direction.

U.S. officials devised the bad asset plan after losses on mortgage-related investments led this month to the bankruptcy of Lehman Brothers Holdings Inc. and government bailouts for American International Group Inc. and mortgage financiers Freddie Mac and Fannie Mae.

The Federal Reserve led central banks in Europe and Asia in pouring cash into global financial markets over the past week due to a crisis of confidence.

To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.net