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Foreign Exchange

Life can be so convex

Whether it’s because so many countries had a public holiday this week or because of the ACI Congress in Vienna, it seems that many traders and brokers have been absent from their desks. <p>Even so, there’s never a dull moment in the markets.

One event that got tongues wagging this week is a big USD/JPY option that went through one of the bookies. Apparently, a total of $5 yards traded of a three-year, 120.00 strike dollar call at 7% vol, which is around 2.5 vols lower than the at-the-money forward strike. The deal is said to have started out as a genuine corporate order to sell $800 million.

Those in the know say that hedge funds have looked to buy such options recently because this is the cheapest part of the curve and they reckon they could get big bangs for their bucks; I’m told that traditional buyers are struggling to fund such cheap plays at the moment, something reflected at the Robin Hood charitable bash in New York on Tuesday. The dinner raised a still-considerable $56.5 million, but this was $15 million less than in 2007. One of my hedge fund muckers says: “Bank participation was much lower – many more personal tables were bought this year. Times are tough.”

As for the big option trade, one seasoned option pro says: “This deal just gives you [the seller] a lot of curve convexity – it looks like a crap trade to me.”

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