Shift in risk sentiment shores up Australian options market

Growth is most obvious in the Australian dollar/New Zealand dollar cross, said Ross Beaney, executive manager in global forex at the Commonwealth Bank in Sydney, "no doubt in line with the rapid rise in the New Zealand dollar itself". But the bank also reported good growth in options in both Australian dollar/US dollar and New Zealand dollar/US dollar, and in Australian dollar/yen flows. Mo<"With large upward moves in Australian dollar/US dollar and New Zealand dollar/US dollar spot rates, the natural bias implied by options risk-reversal premiums has changed, and we’ve seen a very large change in risk sentiment," said Beaney. "As bank clients look for protection, and as banks cover their clients’ interests more frequently through brokers, the transparency has encouraged some meaningful changes in bias."

The underlying rallies in spot forex rates have encouraged clients to hedge again, after the Australian dollar traded in a very narrow range during the latter part of last year, said Stuart Piller, global head of currency options at ANZ Investment Bank in Sydney. "In a little under four weeks, the Australian dollar has risen nearly 6% against the US dollar, one of the quickest rallies we have seen for quite some time," said Piller. "Despite the sharp move in spot, implied volatilities in the Australian dollar are still at historically low levels, so forex options provide a flexible and relatively low-cost hedging tool," he told RiskNews’ sister publication FX Week.The increase in options business appears to be across the board, with different banks reporting increasing interest from a range of varying client bases. National Australia Bank, for example, attributes growing volumes to the greater use of options by offshore institutions, said Gary Dillon, Melbourne-based head of global forex. Commonwealth Bank’s Beaney said it seems that real-money funds are looking for ways to cover their exposures to a rising Australian dollar, while domestic corporates hedging US dollar-denominated export receipts with options are also contributing.

ANZ said it sees an increase in demand across a wide spectrum of its client base. "To a large extent, Australia is still an export-driven economy, so the recent Australian dollar appreciation has highlighted the need to hedge these commercial flows," said Piller. "We have seen further demand for options from other corporate clients taking advantage of Australian dollar strength to hedge foreign currency capital expenditure requirements. Fund managers with offshore investments have also been active, taking advantage of the low cost of forex options to manage their translation risk."

Foreign banks trading in Sydney have a slightly different perspective. David Guarasci, managing director of global foreign currency options at TD Securities in London, said he sees a lot of longer-dated, largely yen-based structuring going through the bank’s Sydney desk.

This could be caused by Japanese clients being more receptive to the currency options markets, he said, and having the appetite to take on more risk.

Most analysts agree that Australian banks are seeing the majority of the increased options flow, as a result of established client relationships and because even offshore business has filtered back to them via brokers. But offshore banks have also contributed to the increase as they are more active in trading and bring more hedge fund and institutional business into the market, said Dillon.