Mitigate EUR/JPY downside risks via PRBS

Currency Derivatives Insights: (EURJPY)

Arrest downside risks of this pair hedging through deploying option strategy: Put Ratio back Spread

Expect the underlying exchange rate of EUR/JPY in order to make steep slumps on the downside.

We recommend purchasing 30D 1 OTM 0.33 delta put (strike at 136.944) and 30D long one deeper Out-Of-The-Money 0.61 delta put (strike at 136.252) and simultaneously short 30D ITM put (strike at 139.71). (The ratio of construction should be 2:1).

As we can make out in the diagram, The ITM strike short put finances the positive deltas and the position is entered for no cost or a very negligible cost as shown in the figure (for a net credit at JPY 277,885.90).

However, margins are required to short ITM puts.

The underlying exchange rate of Yen 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.

We've given this strategy a longer time for expiration (30D) so as to make a substantial move on the downside.