Yen options dealers struggle to hedge intervention risk

Hedge funds’ bets on BoJ intervention are leaving dealers with vol-surface exposures they can’t hedge cheaply

Banks are finding it hard to risk-manage the exotic yen options structures that hedge funds are using to bet on interventions by the Bank of Japan, dealers say.

The trades – reverse knockout (RKO) calls with barriers set above the level where the BoJ is expected to step in – flip dealers’ volatility exposures at precisely the moment intervention fear makes hedges most expensive.

These include