Saturday, July 14, 2007

Euro Rally Versus Dollar to Quicken

Euro Rally Versus Dollar to Quicken in Bloomberg:

Options Suggest Euro Rally Versus Dollar to Quicken

By Liz Capo McCormick

July 13 (Bloomberg) -- Currency options are suggesting that euro will continue to strengthen to record highs against the dollar as concern lingers that losses on debt backed by U.S. subprime mortgages will slow the U.S. economy.

Premiums on options that grant the right to buy the 13- nation common currency versus those giving the right to sell jumped to the highest since April 26.

``Investors are getting more confident in playing a positive view on the euro in options,'' said Naomi Fink, senior currency strategist at BNP Paribas SA in New York. ``Volatility on euro options has risen this week in part due to the concern over the subprime mortgage market.''

The difference between volatility on equivalent one-month euro calls and puts, known as the risk-reversal rate, reached 0.35 percent this week. A positive number signals a premium on calls, which grant the right to buy the currency. As recently as last month, traders favored puts, which grant the right to sell the currency. The euro reached a record high three days after the last time the premium on calls was this high.

The euro touched a record high of $1.3814 today, and traded at $1.3779 at 11:03 a.m. in New York. The currency will reach $1.40 by the end of the third quarter, according to economists at BNP, the biggest French bank by market value.

`Pretty Cheap'

``The risk-reversal trade is a pretty cheap way for investors to participate in the move upward in the euro,'' said John Zafirelis, an options dealer at Forex Capital Markets LLC in New York. ``People are positioning for a move higher in the euro.''

The risk reversal as a trade, in this case, is the purchase of a euro call and the simultaneous sale of a euro put, both with the same so-called delta. Delta measures the rate of change in an options' value relative to moves in the underlying spot market. The position will benefit if the euro appreciates versus the dollar.

Rising implied volatility on most major currencies options, including the euro, has bolstered investors desire to use options to bet on further euro gains, Fink said. Option prices typically rise when implied volatility increases.

`Believe in the euro'

``People have believed in the euro rally but hadn't believed that there would be a rise in implied volatility,'' Fink said. Swings in major currencies have increased this week since Moody's Investors Service cut rating on securities backed by subprime mortgages and Standard & Poor's warned of the credit quality of the securities, Fink said.

Implied volatility on options on the euro against the dollar with maturities three months or less rose between 0.5 and 1.30 percentage points this week. Three-month euro option implied volatility is 5.60 percent, up from 5.25 percent the last week. Implied volatility, a gauge of traders' expectations for future price swings on currencies, is a component of option prices.

BNP's index that tracks implied volatility on three-month options on major currencies has risen to 6.31 percent this week, up from a record low of 5.62 percent on July 4. The rate should rise to about 8 percent later this year, Fink said.

The bank's index includes euro, yen, U.K. pound, Swiss franc, Canadian, and Australian currencies versus U.S. dollar options.

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