Yen Volatility Falls to 3-Week Low on Easing Credit Concerns

By Kosuke Goto

Sept. 13 (Bloomberg) --Volatility on options for the yen versus the dollar fell to a three-week low as concerns eased that credit-market losses will deepen.

Volatility, a gauge of expected exchange-rate fluctuations, slid for a third day as the risk of owning corporate bonds declined in Europe and the U.S., prompting traders to decrease the demand for options to hedge against further strength in the yen. So-called risk-reversal rates on dollar-yen options show traders paid the smallest premium in almost a month for yen calls, which grant the right to buy the currency, versus puts, giving the right to sell.

``With the markets calming down, traders are hardly expecting any panic yen-buying,'' said Ryousei Ishida, senior vice president of foreign-exchange options at Mizuho Corporate Bank Ltd. in Tokyo. ``Speculation the dollar-yen will trade in a small range is pushing down the volatility.''

Implied volatility on one-month dollar-yen options fell to 11.53 percent as of 3:59 p.m. in Tokyo, the lowest since Aug. 23, from 12.50 percent yesterday.

The risk-reversal rate on one-month options was at minus 3.4 percent compared with minus 4.4 at the beginning of the month. A negative value indicates greater demand for yen calls.

Declining Risk

Volatility reached 23.50 percent on Aug. 17, the highest since January 1999, and the risk reversal rate reached minus 6.5 as traders dumped investments funded by loans in Japan. The yen touched the strongest since June 2006 the same day as traders were spooked by a rout in credit markets stemming from losses in securities tied to U.S. subprime mortgages.

The yen was little changed at 114.28 per dollar following a 3.2 percent gain the past month.

The risk of owning U.S. and European corporate bonds fell yesterday, according to traders of credit-default swaps.

Contracts on the CDX North America Investment-Grade Index, a benchmark for the cost of protecting investment-grade bonds from default, decreased 1 basis point to 74 basis points, according to Phoenix Partners Group in New York. A fall signals improving perceptions of credit quality.

Credit-default swaps on the iTraxx Europe Index of 125 companies with investment-grade debt also slid 1.75 basis points to 52.25 basis points, according to JPMorgan Chase & Co.

Contracts on the iTraxx Crossover Series 7 Index of 50 European companies with mostly high-risk, high-yield credit ratings decreased 4 basis points to 349 basis points, JPMorgan prices show. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

Carry Trade

Falling volatility may drive the yen lower by giving investors confidence to borrow in Japan, where the benchmark interest rate is 0.5 percent, and buy assets in higher-yielding markets, known as carry trades.

The yen may also fall on signs the U.S. and European asset- backed commercial paper market is improving and global stock markets stabilizing, reviving confidence of investors to buy riskier assets funded by loans in Japan, according to Kosuke Hanao, head of foreign exchange in Tokyo at HSBC Bank.

The U.S. and European asset-backed commercial paper market is showing signs of improving following a monthlong slide, the American Securitization Forum and the European Securitisation Forum said in a statement yesterday.

`Calming Down'

The Morgan Stanley Capital International Asia-Pacific Index of shares has gained 10.4 percent from a seven-month low on Aug. 17. The 10-day historical volatility of the index was at 10 percent, down from the 40.2 percent reached Aug. 27, the highest since May 2004.

``The ABCP market is doing relatively well, so is the equity market in emerging economies,'' Hanao said. ``The markets are calming down. This will encourage the yen carry trade, pushing up yen-crosses.''

The yen may fall to as low as 115 per dollar today, he said.

In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the borrowing and lending rate. The risk is that currency moves erase those profits.

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