Dollar-Yen Volatility Is Near Decade-High; G-7 May Disappoint

By Stanley White

Oct. 8 (Bloomberg) -- Volatility implied by dollar-yen options rose to the highest in almost a decade on speculation the Group of Seven nations will fail to coordinate a response to the credit crisis, according to Bank of Tokyo-Mitsubishi UFJ Ltd.

Dealers traded yen call options expiring in the next few days with strike prices at 100 yen and 95 yen, betting Japan's currency will extend gains, said Takeharu Miki, an options manager at the company. The deepening credit crunch will prompt a further exit from so-called carry trades, Miki said. In the trades, investors borrow in yen to fund higher-yielding asset purchases.

A Japanese Finance Ministry official, who spoke to reporters today on condition of anonymity, downplayed the need for the G-7 to take joint action on interest rates or currencies to stem the crisis of confidence in the financial system when they meet in Washington starting on Oct. 10.

``The options market is already pricing in a disappointing outcome from the G-7,'' said Miki of Bank of Tokyo-Mitsubishi UFJ, a unit of Japan's biggest lender by assets. ``People are wary of the likelihood that the yen will go higher. Part of this is risk aversion. The yen also benefits because Japan's banks are relatively unscathed by this turmoil.''


The yen rose to 99.61 per dollar, the highest since April 1, and last traded at 100.13 as of 8 a.m. in London from 101.47 late yesterday in New York. Japan's currency has gained 6 percent against the greenback so far this month.

Implied volatility for dollar-yen options expiring in one month with a strike price near the current market rate rose to 25.55 percent, the highest since October 1998.

Risk Reversals

The dollar's one-month 25-delta risk-reversal rate against the yen widened to minus 6.26 percent, the most since March 18, indicating a greater premium for yen calls that allow purchases over yen puts that grant the right to sell.

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. The strike price is the level at which the buyer of an option may exercise it.

The G-7 meets as losses on subprime mortgage-related derivatives have caused credit markets to seize up and led officials in the U.S. and Europe to bail out their banks. The G-7 includes Canada, France, Germany, Italy, Japan, the U.K. and the U.S.

In carry trades investors get funds in nations such as Japan that have low borrowing costs and buy assets where returns are higher. Benchmark rates are 0.5 percent in Japan, 2 percent in the U.S. and 4.25 percent in Europe.

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