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Aug 31 - 05:55 AM

USD/JPY - COMMENT-USD/JPY Options Focus On LDP Election Protection

By Richard Pace  —  Aug 31 - 05:25 AM

Friday saw a massive spike in the cost to protect against USD/JPY volatility and deeper declines, via FX options nL1N2FU0CP, after Japanese Prime Minister Shinzo Abe's resignation announcement -- and this derivative is now focused on the most likely date that his party will decide his successor.

Japan's ruling Liberal Democratic Party plans to hold a leadership vote on Sept.
14 to replace Prime Minister Shinzo Abe, who is stepping down due to ill health, local media reported on Monday nL4N2FX1CN.

2-week through 1-month expiry options have been active on Monday and, despite their premiums having peaked during the initial panic demand for volatility and downside protection on Friday, they remain elevated.

The benchmark 1-month expiry option implied volatility rallied almost 2.0 to 8.0 Friday, though it was now 7.5 as USD/JPY staged a marginal recovery toward 106.00.

By holding these option strikes in conjunction with a constantly adjusted opposing view in the underlying cash rate (delta hedge), owners are able to capture/protect against actual volatility, which they clearly deem will remain a risk until after a new Prime Minister is appointed.
Related nL1N2FX062

For more click on FXBUZ


USDJPY 1-month option implied volatility Click here

USD/JPY 1-month expiry risk reversal Click here

Source:
Refinitiv IFR Research/Market Commentary

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