FxWirePro: Long term AUD/JPY hedging perspectives; DOJI formed to break crucial support at 91.229; PRBS for hedging

Both EOD and weekly graphs suggest bearish signals, Doji pattern formed when the pair was testing a crucial support at around 91.229 levels on weekly charts.

More importantly a Doji pattern candle occurred at 91.243. The occurrence of Doji this stage to signifies weakness in this pair.

Leading oscillators like RSI and slow stochastic curves converging downwards according to the price dips, we believe the breach of this level has set the downward direction of next trend. Currently, the pair managed to take the support at 89.333 levels but its sustenance on closing basis is closely watched. 

 Put Ratio Back Spread: AUD/JPY

With this technical reasoning, we recommend arresting further downside risks of this pair by hedging through Put Ratio Back Spread.

Expect the underlying currency exchange rate of AUDJPY to make a larger move on the downside.

As shown in the figure purchase 1M 2 lots of At-The-Money -0.52 delta puts and sell 1M one lot of (1%) In-The-Money put option in the ratio of 2:1.

The short ITM puts funds to the purchase of the greater number of long puts and the position is entered for no cost or a net credit. The delta of combined positions should be around -0.38 with slightly negative theta value.

If a disciplined hedger strictly follows all these mathematical computations, then irrespective of market sentiments, one can be rest assured with the riskfree exposures in his foreign trade.

The underlying exchange rate has to make substantial move on the downside for the gains in long puts to overcome the losses in the short puts as the maximum loss is at the long strike. Give it abundant time for expiration so as to make a substantial move on the downside.