July 27 (Bloomberg) -- The cost of options protecting against gains in the yen rose to a three-year high as a slide in global stocks led traders to exit riskier assets funded by yen loans and buy back the currency.

So-called risk-reversal rates on dollar-yen options show traders paid the biggest premium since March 2004 for yen calls, which grant the right to buy, versus puts, giving the right to sell.

Traders are hedging against the risk the yen extends a rally that pushed it to a three-month high today. Slumping shares and concern about mounting losses on U.S. home loans have made investors more risk averse, causing them to unwind so-called carry trade bets.

``There's a lot of demand for yen calls,'' said Shinichi Takasaka, manager of foreign exchange and financial products trading at Mitsubishi UFJ Trust & Banking Corp. in Tokyo. ``People are starting to worry about gains in the yen, especially against other currencies. There's less appetite for risk and some speculators are closing bets for yen declines.''

The yen advanced to a three-month high of 118.02 per dollar before trading at 119.11 at 12:27 p.m. in Tokyo from 118.68 yesterday in New York. It climbed 3 percent versus the Australian dollar and 1.8 percent versus the U.K. pound yesterday.

Higher Premium

The risk-reversal rate on one-month options reached minus 2.4 percent, the biggest premium for dollar puts since March 2004. A negative number indicates greater demand for dollar puts relative to calls. The rate was minus 0.65 percent at the start of the year.

Implied volatility on one-month dollar-yen options reached 9.4 percent today, the highest since April 2. Implied volatility fell to 5.725 percent on June 5, the lowest since December 1995, when Bloomberg began compiling data.

Implied volatility, a gauge of traders' expectations for future price swings on currencies, is a component of option prices.

``Investors are looking for some short-term protection on their exposure to the yen strengthening,'' said Neil Jones, head of European hedge fund sales at Mizuho Financial Group Inc. in London. ``It is people getting out of the carry-trade position, given the rise in perceived risk, which has lead to higher volatility.''

The three U.S. stock benchmarks fell more than 2 percent yesterday, as did major indexes in Europe.

Investors have borrowed in Japan, where the benchmark overnight rate is 0.5 percent, to buy currencies in economies where rates are higher. The U.S. key rate is 5.25 percent.

Housing Weakens

Economic reports signaling weakness in U.S. housing helped fuel investor concerns that losses in subprime mortgages will trigger a more broad-based economic slowdown.

New homes sales in the U.S. fell 6.6 percent in June, after a 2.2 percent drop in May, signaling no end to the real-estate slump. The U.K.'s Nationwide Building Society said today home values rose 0.1 percent from June, the slowest pace of growth in 15 months.

``The U.K. house-price growth report was a disappointment,'' said Jones. The subprime mortgage issue is ``becoming international.''

Drying Out

U.S. two-year note yields touched 4.53 percent today, the lowest since March, as investors sought the safety of government debt. The spread, or extra yield, on emerging-market bonds over U.S. Treasuries widened 21 basis points to 2.15 percent, the most since September.

Chrysler and Alliance Boots Plc this week failed to find buyers for $20 billion of loans to pay for their buyouts, according to people with direct knowledge of the negotiations and investors. Ten banks, including Deutsche Bank AG and JPMorgan Chase & Co., were stuck holding the debt.

``The drying out of leveraged-buyout financing is facilitating contagion from credit to equity markets and onward,'' said Steve Pearson, chief currency strategist at HBOS Treasury Services Plc in London. ``This is a process likely to build, not diminish in strength. The three-year period where financial market volatility has declined to low levels is over.''

To contact the reporter on this story: Liz Capo McCormick in New York at Emccormick7@bloomberg.net

Last Updated: July 26, 2007 23:29 EDT