U.S. dollar/Swiss franc risk reversals moved further in favor of dollar puts/Swiss calls last week as dollar weakness dominated the market due mainly to fears of war with Iraq. The 25-delta risk reversal rose to 1.5 vol in favor of dollar puts/Swiss calls Tuesday from 1.2 vol a week earlier. Traders said about USD2 million in risk reversals went through the market on Tuesday afternoon and illiquidity ahead of the holiday week caused dollar/Swiss implied volatility to rise to 10.5% from 9.4% a week earlier. The greenback depreciated against the Swissie to CHF1.4250 in the spot market on Wednesday from CHF1.4770 the previous Friday.
Investors were buying one-month dollar puts at strikes of CHF1.40 and selling one-month dollar calls with strikes at CHF1.4550 when spot was trading at CHF1.43, according to traders. Hedge funds were thought to have executed most of the trades, which is typical for strategies motivated by political risk, traders explained.
T.J. Marta, foreign exchange strategist at Citigroup in New York, said only part of the dollar weakness against the Swiss franc was due to the war effect on the greenback. In addition, the Swiss franc tends to trade in sympathy with the euro, so dollar weakness against the Swiss franc could be attributed to cross border merger and acquisition activity that pushed the euro higher last week and also year end repatriation of European investments in dollar securities.
UDS/CHF Spot & 25-Delta Risk Reversal
