Impact of COVID-19 Turmoil on the Foreign Exchange Option Market: Evidence from the Japanese OTC Derivative Transaction Data

Yasutaka Takizuka and Kazuya Suzuki
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Yasutaka Takizuka: Bank of Japan
Kazuya Suzuki: Bank of Japan

No 22-E-6, Bank of Japan Review Series from Bank of Japan

Abstract: This report investigates granular transaction data for USD/JPY options, focusing on the individual transactions around March 2020 in order to visualize the impact of the COVID-19 pandemic on the market. The main results are as follows. First, through March 2020, entity-level implied volatility indicates that the market perception about Foreign Exchange (FX) risk was widely dispersed, and liquidity in the FX option market dropped. Second, under such market conditions, prices of large-size put options, which are used for hedging yen appreciation risk, were especially higher than usual, and market participants seemed to deal with the price hike by breaking trades into smaller blocks and diversifying their counterparties.

Date: 2022-08-17
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