Cross-currency basis causes pricing headache for dealers in Japan
Differences in the cost of yen and dollar funding are significantly impacting the price of Japan equity options at the long end of the curve and driving dealers on to the listed market
While Abenomics has been a boon for short-dated Nikkei options, at the medium to longer end of the curve the yen/dollar cross-currency basis swap has added an additional funding cost to the pricing equation which is causing a headache for the market and deterring some institutions from taking positions.
Pre-crisis the cost of converting yen to dollars was negligible but since then the funding spread has blown out and the market is now trading at 50 basis points, making it more expensive to
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