Forex options investors look past credit turmoil

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) - Financial markets may still be reeling from the wreckage of the global credit crisis, but currency options investors are already looking past the storm and easing their way into a period of steady yet low volatility.

Despite renewed credit jitters, following huge writedowns and shoddy earnings from U.S. banks, currency volatility has started to recede in the last few weeks after a spike in March following the collapse of U.S. investment bank Bear Stearns.

BNP Paribas' index of currency volatility has declined more than 25 percent since its surge on March 17. On Thursday, the index slipped further to 10.02 from 10.87 last week.

The implied volatility or "vol", used by banks to price options, in pairs such as dollar/yen, New Zealand dollar/U.S. dollar, Australian dollar/U.S. dollar, and euro/yen has also fallen sharply by an average of 40 percent since the peak in March, according to Reuters data.

Analysts said while spot market activity has been heavy in these currencies, the reaction to heightened risk aversion has been subdued.

"Since mid-March, volatility has been in a gentle decline and even the spike in vols in the last two weeks is now being retraced and we're starting to get into a comfortable downtrend," said Simon Smollett, an options analyst at Calyon.

"I don't think option prices are going back to 2006 levels, especially with commodities where they are right now, but...I think it will be a gentle decline from here."

Not too long ago, "vols" had languished in the doldrums as low global interest rates and a prolonged period of economic growth stoked investors' appetite for higher-yielding currencies.