Long/short of volatility swaps as a pure volatility trade between EUR/USD/JPY, we recommend getting pure volatility exposure via a long short of volatility swaps.

This allows for getting rid of systemic delta hedging and more generally of most of the gamma risks.

The pay-off of these instruments depends on realized volatility, but their market to market (vega) is sensitive to implied volatility as well.

Indicative bid: Receive 3.4 vols (USD notional on both legs), we expect the implied vol spread to converge towards one volatility point. We recommend unwinding the position before the expiry as soon as the net profit exceeds this level.

Rationale: Volatility relative value opportunity with asymmetric risk profile, the spread between USD/JPY and EUR/USD 3m volatilities is very wide, exceeding three volatility points (see Graph) and Please be aware of clear divergence between 1m IVs and HVs of USDJPY. This is not sustainable, and we expect a tightening.

Risk profile: A Further divergence between EUR/USD and USD/JPY volatility, new uncertainties in Japan (BoJ easing in September?) could generate yen turbulence.

Investors holding the position until the 3m expiry face unlimited losses if the realized volatility between USD/JPY and EUR/USD eventually exceeds 3.4 vols.