Option Butterfly Signals Traders Underplaying Currency Risk

Currency derivatives suggest investors are underestimating the risk of broad swings in foreign-exchange markets as the Federal Reserve completes its bond-purchase program and lawmakers spar over the U.S. debt limit, according to Bank of America Corp., JPMorgan Chase & Co. and UBS AG.

“You are looking at a massive event risk coming up, and the options market is underestimating that,” said David Woo, head of global rates and currencies research at Bank of America Merrill Lynch in New York. “These two issues could interact in very unexpected ways and become a major source of volatility in the markets.”