Forex Investment and Currency Trading

The powerful upswing in FX vols, which characterized 2008 has given way to a more mixed picture in early 2009. Most strikingly, the bell-weather “risk appetite” crosses, such as AUD-JPY, are posting realized vols well below the October 2008 peaks. Where day-to-day gamma is still high by historical standards, many of the abrupt moves are subsequently mean–reverting rather than seeing new, powerful trends. However, the picture remains mixed. Pockets of localized FX weakness (such as MXN and the Emerging European currencies) still have potential to drive vols back close to late-2008 highs. Understanding these cross-currents is key to successful option [...]

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With historically high implied vol and risk reversal values remaining in the currency markets, even as realized vols have drifted lower, there is a significant opportunity to lock in attractive hedging rates for US companies with yen revenues. Currency strategists anticipate USD/JPY to hit 104 by end of year 2009 — more than 15% higher than current levels.
Market References:

USD/JPY spot 89.75
1 year outright 89.10
1 year implied vol 16.0

Strategy #1: Vanilla Range Forward

Buy 1 year 97.00 USD call / JPY put in $10M
Sell 1 year 72.00 USD put / JPY call in $10M
Premium: Zero

For zero upfront premium, companies may achieve a [...]

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One of the basic forms of forward transaction is the option contract. An example of this is an option on shares (equity option). It again involves the delivery of and payment for an underlying asset or instrument on a future date. Its unique feature lies in the fact that one of the parties to the contract can decide whether the contract will be fulfilled and thus the underlying asset delivered; he thus has the “option” of whether to exercise his right under the contract. In return for granting him this right, he pays the seller of the option an amount [...]

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76.4% Fibonacci of the rally from 27th October held at 1.4673
The market then bounced and has effectively setup another 76.4% Fibonacci retracement against the 14th Jan low
Trend resistance has been breached
A close above 1.4865 today will mean a bullish key day reversal will be posted
Given the setup, we believe this is a good platform for a turn in trend. As a minimum to expect a test of the December 2008 high at 1.5880. Further gains beyond that cannot be written off

As a result - Long a 3 month 1.55 EUR Call / CHF Put option with a knockout at 1.45 [...]

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