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.

Alexandre Nutte
© 4-traders.com 2012
Latest news
Date Title
<1m ago Major Averages Posting Substantial Gains In Early Trading
<1m ago MULTIPLE MYELOMA RESEARCH FOUNDATION : Team for Cures Supports Extending Lives
<1m ago RESEARCH AND MARKETS : PESTLE Analysis of Chile 2014
2m ago NEXSTAR BROADCASTING : Other Events, Financial Statements and Exhibits (form 8-K)
2m ago BUSINESS MACHINES : IBM Expands Global Cloud Footprint With First SoftLayer Cloud Center in France
3m ago PROTECTING THOSE WHO PROTECT OTHERS™ : First Responders and Healthcare Workers Eligible for Never-Before-Offered Ebola Insurance Coverage Offered through Lloyd’s of London
4m ago BARCLAYS : Form 8.3 - Chiquita
4m ago CREDIT CHINA : Announcements and Notices - Continuing Connected Transactions Sub-tenancy Agreement and Master Agreement for Business Centre
4m ago SAUDI ARABIAN MINING MA'ADEN : No Translation
4m ago LAND SECURITIES : Announcement of Half-yearly results - 11 November 2014
Latest news
Advertisement
Hot News 
OIM : 16 october 2014 - PAYMENT OF DIVIDENDS SUSPENDED
INFINERA : beats Street 3Q forecasts
TRUEBLUE : Results of Operations and Financial Condition, Regulation FD Disclosure (form 8-K)
BUILD A BEAR WORKSHOP : Reports Increased Sales and Earnings for the Third Quarter of Fiscal 2014
ULTRATECH : Results of Operations and Financial Condition, Financial Statements and Exhibits (form 8-K)
Most Read News
1d ago ATMEL : Patent Issued for Apparatus and Method for Increasing the Quantity of Discrete Electronic Components in an Integrated Circuit Package
1d ago EXELON : ICC Approves ComEd’s Grand Prairie Gateway Project
1d ago TERADYNE : beats Street 3Q forecasts
1h ago Tesco accounting black hole deepens, chairman to step down
2h ago Unilever promises more cheap goods, cost cuts to tackle slowdown
Most recommended articles
7m agoDJAMAZON : Looking at Bigger Loss--Earnings Preview
8m agoDJPRESS RELEASE : The Conference Board Leading Economic Index(R) (LEI) for the U.S. Increased in September
8m agoDJNew Home Sales Seen Falling 6.7%--Data Week Ahead
8m agoDJCHEVRON : Unveils Oil Discovery in U.S. Gulf
9m agoDJSUBSCRIBERS : Newswires To Publish Only Chicago PMI Main Barometer Starting Oct. 31
Dynamic quotes  
ON
| OFF