Investors Should Buy Dollar-Yen Double-No-Touch, Barclays Says

By Stanley White

Nov. 26 (Bloomberg) -- Investors should buy “double-no- touch” options expiring in one month to bet the dollar will trade between 90 and 100 yen, according to Barclays Capital, a unit of Britain’s second-biggest lender.

A double-no-touch pays the buyer a fixed amount should the underlying currency remain between two levels during the life of the option. The dollar is likely to stay in a range against the yen as both are rising versus the euro due to a reversal of so- called carry trades, according to Mathieu Zaradzki, chief foreign-exchange options strategist at Barclays Capital in London.

“The yen and the dollar have both benefited from increased risk aversion and deleveraging as both have been used heavily to fund carry trades in high yielders and emerging-market currencies,” Zaradzki wrote in a research note yesterday. “The dollar-yen has been holding in a range quite well recently despite the elevated volatility, and we believe this will continue to be the case over the next month.”

The dollar was little changed at 95.09 yen at 11:58 a.m. in Tokyo from late yesterday in New York. Since Oct. 24, the dollar has traded in a range from 90.93 yen to 100.55 yen.

The greenback has appreciated 21 percent against the euro in the past six months, while the yen has gained 32 percent versus the 15-nation currency as risk of a global recession, a credit- market seizure and $971 billion in losses on mortgage securities prompted investors to pare purchases of higher-yielding assets funded with currencies where borrowing costs are lower.

Benchmark interest rates are 0.3 percent in Japan, 1 percent in the U.S., 3.25 percent in Europe, 6.5 percent in New Zealand and 13.75 percent in Brazil.

Implied Volatility

Volatility implied by dollar-yen options expiring in one month with a strike price near current levels rose to 23.22 percent from 22.32 percent yesterday. The one-month 25-delta risk reversal rate was at minus 9.74 percent compared with minus 9.64 percent yesterday.

Traders quote implied volatility, a measure of expectations for currency swings, as part of pricing options. Higher volatility may discourage carry trades as it makes profits harder to predict. Delta measures the rate of change in an option’s value relative to moves in the underlying currency. A negative risk reversal rate shows a greater premium on dollar put options, which grant the right to sell, than on call options that allow purchases.

“The strong risk reversal reflects significant downside risk if we were to break below 90 yen due to various stops below this level,” Zaradzki wrote. “It does not reflect an amplified probability of breaking this level. A double-no-touch is therefore the perfect trade.”

A stop is an automatic sell order used to limit currency losses.

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