Yen Hedging Cost Spikes to Three-Year High on Fragmented Forecast

Yen Hedging

In the midst of the lack of general agreement over where the yen is headed, the cost to hedge against changes in the Yen over a year using options has spiked to the highest level in more than three years. A Bloomberg survey shows that the global bank’s predictions for the Japanese currency range from a call for a 14 percent rally from now through 2017 to that for a 9 percent decline.

The yen’ one-year implied volatility versus the dollar, a major part of option prices, rose 54 basis points this week to 12.49 percent, a level that haven’t been seen ever since September 2013. The measure went up 43 basis points over the actual spot-market volatility, the widest gap in more than a month.

The volatility curve has moved higher since the start of this year even as shorter-end option process trade close to last year’s averages. Still, it remains upturned as front-end prices have gone up even more. Prior to the press conference of U.S. President-elect Donald Trump, the one-week measure went up 1.5 percentage points today to 14 percent.

Investors look to hedge their dollar-long positions in the spot market so options that secure against dollar dips against the yen were in demand this week, whereas according to traders in London, trading in a longer continuous course was mixed.

Investors are taking the hits as analysts get into an argument over how the yen will move this year.

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