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Bet Dollar-Yen Option Volatility to Rise, Bank of America Says

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March 7 (Bloomberg) -- Option volatility on dollar-yen is the most likely to rise amid historically low bets on swings in exchange rates, according to Bank of America Corp.

Implied volatility for dollar-yen options will increase if the Japanese currency gains in a negative risk environment or if it continues its 4.9 percent year-to-date decline, according to John Hopkinson, head of quantitative foreign-exchange research at Bank of America Merrill Lynch in New York. Currency volatility will remain depressed in 2012 as concern over a disorderly default in Greece dissipates and central banks maintain accommodative monetary policies, he forecasts.

“The one exception to our general outlook is that dollar-yen volatility defiantly has room to increase,” Hopkinson said in an interview at Bank of America’s headquarters in New York on March 5. “It’s hard to see dollar-yen volatility going lower regardless of where the spot goes.”

Three-month implied volatility on dollar-yen options has more room to rise after climbing to 10.125 percent from a more than four-year low of 7.505 percent on Jan. 11, he said.

Bank of America forecasts the yen will weaken to 81 per dollar by June and slump to 82 by the end of the year. The Japanese currency gained 0.8 percent to 80.89 per dollar in New York yesterday.

The premium on dollar calls, which grant the right to buy the currency, relative to puts, which give the right to sell, fell to the lowest in more than a month yesterday. The so-called three-month risk reversal rate touched 0.09 percent, compared to a record high of 0.53 percent reached on Feb. 20.

Implied volatility, a gauge of traders’ expectations for price swings, increases as demand for options rises. Traders quote implied volatility as part of pricing options.

To contact the reporter on this story: Allison Bennett in New York at abennett23@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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