As the delta risk reversals of EURJPY have again shown in bearish interests as the progressive increase in negative numbers signify the traction for hedging sentiments for further downside risks in both short and long term.

Guaranteed hedge at the lower strike (worse than the outright forward rate if unleveraged) in order to benefit from a favorable market move up to the higher strike.

How it works: At expiry, one of the following scenarios may occur: 1) Underlying trades below the lower strike, you should short the notional amount at the lower strike.

2)  Underlying trades at or above the Lower Strike and below the higher strike, no transaction takes place on the settlement date. You could sell the notional amount at the prevailing spot rate (outside this structure).

3)  Underlying trades at or above the Higher Strike you are obliged to sell the notional amount (multiplied by the leverage factor, if any) at the higher strike. Your profit potential is limited at the higher strike.

We recommend initiating short EURJPY positions for the long term by bidding 1m risk reversals hedging but by capitalizing on every short-term upswing, preferably via options ahead of next week’s ECB meetings.

Despite acknowledging the recent uptick in the implied volatility of Euro crosses, especially EURJPY with higher negative risk reversal is justifiable when you have to observe the spot curve of this pair (see IV and RR nutshell and compare this with spot prices).