Credit Suisse Recommends Buying Put Options on British Pound Versus Dollar

Dollar to Rebound Versus Pound This Year, Credit Suisse Says

http://www.bloomberg.com/apps/news?pid=20601102&sid=aeWKXfHPl7GI&refer=uk

By Liz Capo McCormick

May 18 (Bloomberg) -- Investors should use options to bet the dollar will extend gains against the British currency as U.S. economic growth accelerates, Credit Suisse said.

The dollar will likely strengthen as signs of faster growth discourage the Federal Reserve from lowering interest rates and makes U.S. assets more attractive. The dollar has gained 2 percent against the pound since hitting a 25-year low on April 18.

``Dollar weakness will continue to unwind as the data in the U.S. begin to pick-up,'' said Tim Graf, a derivatives strategist in London at Credit Suisse. ``Growth is rebounding. We expect the Fed to keep rates steady.''

The dollar may rise to $1.90 per pound in six months, the strongest since November, and will trade at that level in 12 months, Graf said. The currency was at $1.9747 at 9 a.m. in Tokyo.

Credit Suisse advises investors to buy options in a strategy that will profit if the dollar trades in a range versus the pound for the next two months and then gains.

A Fed report this week showing U.S. industrial production rose 0.7 percent in April, after a 0.3 percent decline in March, suggests the world's biggest economy is gaining momentum, according to Credit Suisse.

Central Banks

The Fed will keep its benchmark rate at 5.25 percent through next year, according to Credit Suisse, the second-biggest Swiss bank. The Bank of England will lift its overnight rate by a quarter-percentage point to 5.75 percent in August and then pause, Credit Suisse said. The next rate increase will be the fifth by the central bank since August.

One more U.K. rate increase won't help the pound because investors have already factored the move into exchange rates, Zurich-based Credit Suisse said in a report on May 17.

Graf advises buying a six-month put, which grants the right to sell the pound against the dollar, at a so-called strike price of $1.98. The put contains two so-called barrier levels, causing the option to expire if the pound touches or trades below $1.9350 or above $2.0250 in the next two months.

``This trade looks to capitalize on the view that we won't likely see a lot of movement in the next two months given the current low volatility environment'' and as traders in the U.K. and North America head off on summer vacations, said Graf. ``The range on the barriers is wide enough that we feel comfortable setting them in order to help subsidize the cost of the trade.''

Barriers reduce the cost of the strategy because they decrease the odds the options will be profitable.

Implied volatility on six-month pound-dollar options was 5.95 percent on May 17. The measure fell to 5.9 percent on May 11, the lowest since October 1996. Implied volatility, a gauge of traders' expectations for price swings on the underlying currency, is a component of options prices.

After the two-month barrier period, the option will become a so-called plain vanilla put option on the pound that expires on Nov. 16. The option will pay a return if the exchange rate is below the $1.98 strike price at expiration. The most the strategy can lose is the price paid for the option.