Damaged option dealers at risk

By Satomi Noguchi and Hideyuki Sano

TOKYO (Reuters) - The seismic shocks on Wall Street have driven the yen back towards 100 per dollar, causing tremors of a different kind for some Japanese and foreign securities houses in the currency options market.

Market players are fretting that the yen's surge, if sustained, could lead to a repeat of the violent options-driven moves seen in March when hedging demand reached heady levels.

The yen rally is threatening to wreak havoc for dealers with option books tied to an array of structured derivatives, such as power-reverse dual currency notes, that give investors payouts betting that the yen will not reach extreme levels like 90 or 120 yen per dollar.

The risk has been heightened by the collapse of major market players, including Lehman Brothers, that has made trading in the over-the-counter derivatives market fraught.

With fewer players around to take the other side of trades, means market moves are prone to be more violent.

For that reason, a yen push through 100 would likely be even more painful for dealers grappling with big exposures on their books, said sources in more than a dozen interviews with Reuters.

"The problem that the market faces now is that we have fewer participants, a reduced number of risk-takers," said Takeharu Miki, chief of currency options trading at Bank of Tokyo-Mitsubishi UFJ.

"That thin liquidity makes it tough for market players to find prices and do trades associated with derivative products."  Continued...