To Protect Themselves from Yen Rebound, Investors Purchase Short-Term Options

Yen Rebound, Investors Purchase Short-Term Options


Fears of intervention and the uncertainties regarding the Bank of Japan policy meeting next week have traders scrambling to protect against future yen increases. As investors made preparations for the BOJ's policy announcement on September, the yen increased 0.4% against the USD on Friday. The premium to insure against a big rise within the next week compared to a loss has jumped to its highest level in almost three months, and some investors are hedging their positions in the options market. 

As the Federal Reserve leads the others around the world in tightening, the yen has fallen about 20% versus the dollar this year as a result of the BOJ's continued implementation of its negative rate policy, which has resulted in a widening yield disparity.While the Japanese Central Bank will have the most influence on its path, Japanese authorities have urged against action to halt additional currency losses. Investors will therefore view every BOJ meeting as posing a small chance that the central bank would alter its tone or stance. The meetings with annual forecast updates and the publication of the BOJ's prognosis for prices and economic activity will be given the most attention. 

In this image, you can see the monthly volatility evolution on the "USDJPY" currency pair, so the percentage changes described in the article here are the differences between periods.

monthly volatility evolution on the "USDJPY" currency pair

The 10-year yield has recently tested the top limit of the central bank's guided objective of 0.25% against a background of rising global rates, putting the yield-curve control policy to the test.In contrast to protection against spot rallies over the same time period, investors currently must pay a 2.37% extra to hedge the dollar-downside yen's for a week. After the ministry of finance increased its rhetoric about probable action to stop a decline that saw the yen weaken compared to the american dollar earlier this week, traders were already worried that the yen might climb.