Monthly Archives: October 2009

The new government of Japan is having difficulty with the aggressive nature of the Japanese Yen. It seems as though the finance minister, Fujii is looking to possibly intervene, rather than allow a strong Yen to continue. He has indicated that if the foreign exchange market is disorderly, there will be an official response. It is believed that he is talking about volatility. Actual volatility, which is the variance of the US Dollar vs. Japanese Yen exchange rate and implied volatility, which is reflected in current option prices. The exchange rate between the two is the lowest it has been in over a year and the implied volatility based on the 3-month benchmark is at the upper end of the previous month’s trading volume. Another issue is the pricing of risk-reversals and the parity of puts-calls in relation to the forwards. Then Bank of Japan has not intervened on the US Dollar-Japanese Yen since 2004. However, the pricing of risk-reversals was useful in anticipating intervention.Yen calls have for the most part, traded at a premium to Yen puts, due in part, to the role of Japanese corporate companies who wanted to protect foreign sales. The 3-month risk reversal is in favor of Yen calls by 3% today. This is in line with what has been seen over the past few weeks.