Member access

4-Traders Homepage  >  News

News

Latest NewsCompaniesMarketsEconomy & ForexCommoditiesHot NewsMost Read NewsRecomm.Business LeadersVideosCalendar 

USD/JPY: Bullish strategy

10/16/2012 | 06:00am US/Eastern

It has been over 20 years since Japan is plunged into deflation, monetary phenomenon that is characterized by a continuous decline in prices. Companies are no longer investing and consumption slow down, consumers constantly pushing their purchases in order to get cheaper prices. This situation inevitably leads to a slowdown in the Japanese economy that fails to pick up, despite massive injections of liquidity by the Central bank of Japan.

The BoJ under its quantitative easing should inject nearly 20,000 billion yen (about 255 billion dollars) by the end of the year. However, Japanese banks have substantial stocks of cash due to a lack of demand for credit.
 
Japan is further penalized by a strong yen that prevents a resumption of exports of the archipelago. They accounted for 17.6% of GDP in 2007 against only 11% expected in 2012.
 
Why so strong currency with a high debt ratio?

With a debt that will reach more than 220% of GDP in 2013, we are entitled to ask why the yen is considered as a safe haven. The first thing to know is that the strength of a currency is not measured by the growth potential of the country, but the stability of the currency in foreign exchange. In addition, the japanese debt is owned by 92% by domestic actors (banks, insurance companies and individuals) and 8% by foreign capital. In comparison, European debt is owned by more than 50% of non-European investors.

This is why, despite its amount of debt, Japan finance it at a rate between 0 and 1%. Residents repay the debt (through taxes) and are both creditors by investing their savings in the debt. Thus, Japan retains funding capacity and stability in yen. Thus, it is considered a safe haven in times of risk aversion and traders buy the yen.

In this context, the Japanese central bank never ends to provide liquidity in order to halt the spiral of rising yen against the US dollar hit by the economic slump in the United States. The downward trend of parity has been observed for more than 10 years. It is clear that these actions have no effect on the local currency. Various policy statements from the Empire of the Rising Sun suggest that the BoJ may soon resort to the method used by the Swiss National Bank, establishing a floor (between JPY 83 and 85) on  the currency against the US dollar and thus, to support exports for the japanese companies
 
In this context, we decided to set up a strategy of " bullish channel" which involves to sell a put option in order to finance the purchase of a call option.

Strategy
 
Purchase of a call option “out-of-the-money” with the sell of a put option “out-of- the-money”. Besides the premium should be the same for a “cash flat” strategy.
 
For a maturity of  3 months :
 

  • Strategy is winning in case of rapid increase of parity
  • This strategy is flat in case of stability or slight decline
  • Strategy is losing if the parity decline. In this case, you will have to buy the USD/JPY at the strike price (more expensive than the spot price)


 


In the latter case, there is an outperformance of the option strategy compared to a spot purchase at the moment.
 
This is an option strategy which allows to speculate without exposure to the time value, an increase of USD/JPY, within three months with much lower risk to the spot purchase.

© 4-traders.com 2012
React to this article
Latest news
Date Title
01:25p TAIGA BUILDING PRODUCTS : May Note Interest Payment
01:25pDJAfrican Economies to Grow 4.5% on Average in 2015
01:24p TREND MICRO : Managing BYOD security challenges
01:24p RESEARCH AND MARKETS : Norway Manganese Oxides Market Report 2015
01:22p PEABODY ENERGY : discussion of Africa’s Ebola crisis was perfectly proper
01:20p JUVENTUS FOOTBALL CLUB : Injured Barzagli doubtful to play Champions League final
01:20p RESEARCH AND MARKETS : Singapore Metal and Nonmetallic Chlorides, Bromides and Iodides, Chloride Oxides and Bromides Oxides Market Report 2015
01:19p RESEARCH AND MARKETS : Spain Metal and Nonmetallic Chlorides, Bromides and Iodides, Chloride Oxides and Bromides Oxides Market Report 2015
01:18p KENYA AIRWAYS : nabs Vietnamese for alleged rhino horn smuggling
01:17p PLAINS ALL AMERICAN PIPELINE : Company lowers worst-case scenario for California oil spill
Latest news
Advertisement
Hot News 
BIOSYNEX : to Merge with Prodiag
GRUPO EMPRESARIAL SAN JOSE : Construtora Udra will execute a housing unit building at 6, Largo do Chiado, Lisbon 25/05/2015
ENERGIZER : Adopts Limited Duration Shareholder Rights Plan
FRESH MARKET : Drew Brooks: Fayetteville gets Fresh Market. Now where's Cheesecake Factory?
Sports schedule for Tuesday, May 26
Most Read News
05/24 ROYAL DUTCH SHELL A : Anti-drilling activist helped off Shell ship in Bellingham Sunday
05/24 SAN MIGUEL : SMC to bid for Malampaya banked gas
05/24 DIGI : Cyber safety from predators
05/24DJEDF Bids for Areva's Reactor Unit
05/24 SIRIUS RESOURCES N L : IGO: Independence to acquire Sirius
Most recommended articles
01:07pDJCharter Communications Nearing Deal for Time Warner Cable -- 2nd Update
12:58pDJPeru Reopens Roads, Detains Protesters in Copper-Mine Dispute
12:53pDJEUROPE MARKETS : Jitters Over Spanish Elections, Greece Hit Banks, Euro
12:51p Wildfire shuts down about 9 percent of Alberta crude output
12:45p FED'S FISCHER : Too much weight placed on Fed's first rate hike