Marginal yields possible on Iron butterfly of USD/JPY

The BoJ's rate policy meeting was held under the impression that not even the Japanese officials can deny any longer that the inflation target of 2% is as far off as it has ever been.

The fact that the effects of the VAT rise will now largely be omitted from consumer prices makes this clear to see. In the end the central bank left everything unchanged. It neither extended the purchases nor lowered interest rates on excess reserves (currently at 0.1%). The JPY was able to benefit slightly.

Trade data showed a mixed picture with exports up solidly, but imports down more than expected.

Japan's trade balance for April reached a deficit of Y53.4 billion, narrower than the Y319 billion deficits seen and exports rose 8.0%, better than the 6.4% increase expected and imports declined 4.2%, more than the 1.5% drop expected.

The BoJ now assumes that the inflation rate will initially remain at 0%. The BoJ pointed out in the statement that QQE (Quantitative and Qualitative Easing) had shown the desired effects and that it would remain in place until the inflation target of 2% was reached. Let's see how long JPY will be able to defend its gains following the central bank decision. 

Currency Option basket: Iron Butterfly (USD/JPY)

The iron butterfly spread offers partial risk and partial returns trading strategy that is structured for a bigger probability of earning limited returns when the underlying currency is perceived to have a low volatility.

In order to build this strategy, the hedger takes position as stated below,

Iron butterfly = Buy 1 OTM Put + Sell 1 ATM Put + Sell 1 ATM Call + Buy 1 OTM Call, this results in a net credit to put on the trade

The maximum profit from this position is to the extent of premium received and it can be achieved when the underlying currency price at expiration is equal to the strike price at which the call and put options are sold. At this price, all the options expire worthless and the trader gets to keep the entire net credit received when entering the trade as profit.