FxWirePro: CAD/JPY option straps for hedging on fragile short term uptrend

BoJ's easing (QQE) has been deferred due to a contraction in GDP in Q3 15; the BoJ attaches importance to the risk of inflation expectations weakening due to such an exchange rate move. In this sense, the recent drop in survey-based inflation expectations should be noted.

Currency Hedging Framework: (CAD/JPY)

Since we don't want to go against and buck the trend, the short term trend remains sideway to slightly uptrend, hence the combinations are the most suitable that allow adding both calls and puts at a time in our strategy unlike spreads.

It is observed that chances of CAD's strength against yen but in long run Yen may still look superior over Canadian dollar, we advise to hedge the C$'s appreciation through below recommendations.

With volatility of ATM contracts of next month expiry being marginally higher (at 12.67%), buying 15D At-The-Money delta put option and simultaneously buy 2 lots of 15D At-The-Money delta call options keeps tight hedging regardless of swings.

It involves buying a number of ATM puts and double the number of calls, ATM instruments because of Vega advantages so as to have high chances of more options sensitivity. The strap is more of customized version combination and more bullish version of the common straddle. Hence, any hedger or trader who believes the underlying currency is more likely to surge upside can go for this strategy.

Huge returns achievable with this strategy when the pair makes a strong move on either upwards or downwards at expiration, with greater gains to be made with an upward move.