Friday, July 17, 2009
To explain further, the premiums built into options contracts serve as a proxy for demand for those particular currencies. When premiums on call contracts, which give the holder the right to buy a particular currency at a fixed price, are unusually high, it signals a "risk reversal;" the currency may be overbought. To offer a practical example, call premiums on EUR/USD contracts are approaching a one-year high, which has led some analyst to speculate that a Dollar rally is just around the corner. MarketWatch reports:
"Whenever risk reversals hit critical levels, it indicates that everyone who wants to be long euros are already long and as a result, sentiment has hit an extreme." The last time euro/dollar risk reversals were that high….a U.S. dollar "relief rally" followed.
Posted by iMr at 2:08 AM