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FX Forwards Find Favor; Goldman Active

Derivatives Week

Mike Kentz

Firms bought approximately USD1 billion in Euro/U.S. dollar forwards and just over USD500 million in U.S. dollar/Swiss franc forwards on volatility on Wednesday and Thursday, with Goldman Sachs seen as the most active participants in the trades, according to traders in New York and San Francisco. The trades were the biggest seen in an otherwise quiet week for fx option trading volume, with volatility movements on the back of the trades staying relatively stable.

The largest trades in EUR/USD were at-the-money forwards, with tenors of one year. The trades in USD/CHF trades had tenors of nine months. The USD/CHF trades were bought as alternatives to the EUR/USD as worries over liquidity in the latter pair sent the firms looking for alternatives. Traders and salesman noted that USD/CHF often acts as a proxy trade for EUR/USD due to the relative fundamental similarities in volatility movement between the euro and Swiss franc.

The trades pushed volatility up from approximately 12.8% on Wednesday morning to 13.05% on Thursday morning. However, traders expressed surprise that volatility didn’t move higher, with one attributing the lack of movement to a rise in spot from 1.4725

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