Currency futures and options make available several types of trades including calendar, or time, spreads that depend on variations in value between options on the same currency, along with near-term and deferred futures, spreads between options on different currencies with the same expiration date, covered interest arbitrage and carry trades.
“Forex five” (below) illustrates potential spreads between several currencies all having the same expiration date in June 2013. Of the five — which include the Japanese yen, Swiss franc, British pound, Australian dollar and euro — the yen is remarkable for its separation from the others in terms of implied volatility. At the point where the underlying futures price is equal to the strike, none of the other options rises above 1.5% of the strike price, while the yen achieves 2.76%.
Volatility is implied because future price variations are not known; however, the futures market forecasts are based in part on recent movements in the underlying. From Jan. 1 through Feb. 8, the yen declined 6.16%, while the other four currencies in the sample fell a maximum of 1.93%. Several had up and down changes of 2% or less. There is good reason for the market to treat the yen, at least temporarily, as a special case.