Dec. 11 (Bloomberg) -- Demand is declining for options that protect against gains in the Swiss franc and Japanese yen, suggesting investors will become more comfortable holding higher yielding assets financed with loans from Switzerland and Japan.
The one-month U.S. dollar-Swiss franc option risk-reversal rate had 0.10 percentage points implied volatility premium in favor of franc calls yesterday, about one fifth of the 0.55 premium that held on Nov. 26. In dollar-yen options, the premium on yen calls was 2.18 percentage points, about one half the 4.5 percent premium on Nov. 26. Demand for calls had soared as the fallout from the collapse of the subprime mortgage market drove investor to exit so-called carry trades.
``There's been a reduction in risk-aversion,'' said Neil Jones, head of European hedge-fund sales in London at Mizuho Capital Markets. ``The fact that global stocks have performed well and that volatility has declined has been a positive.''
Switzerland's 2.75 percent interest rate is the lowest among industrialized economies after Japan's 0.5 percent, making the currencies popular funding sources in nations with higher returns. Swings in foreign-exchange rates erode profits from interest-rate differentials.
The franc is the third-worst performer of the 16 major currencies tracked by Bloomberg in the past week, trailing behind losses posted in the Swedish Krona and the Japanese yen.
The franc was little changed at 1.1280 per dollar yesterday, and is down 2.3 percent since Nov. 23. The dollar bought 111.68 yen yesterday, a decline of 3.8 percent since it touched a more than two-year high of 107.23 on Nov. 26.
Volatility Declines
Stock-market volatility as measured by the Chicago Board Options Exchange SPX Volatility Index, or VIX, declined to 20.74 yesterday, from 31.09 on Nov. 12, its highest closing price since March 2003. Volatility has dropped as stocks rallied, with the Dow Jones Industrial Average gaining 5.7 percent since Nov. 12.
read more:Swiss Franc, Yen Options Demand Falls as Risk Aversion Declines
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