ABN Advises Options for Bet Against Euro Before French EU Vote

April 14 (Bloomberg) -- ABN Amro Holding NV recommended that investors use options to bet against the euro before a referendum in France next month on the European Union's draft constitution, because the country may reject the charter.

``The markets don't seem to be factoring in any risk, and maybe that's a bit over-optimistic,'' said Shahab Jalinoos, a currency strategist at ABN Amro in London. ``Investors are beginning to take this quite seriously.''

At least eight polls in the past three weeks have signaled most French voters are opposed to the constitution. Dresdner Kleinwort Wasserstein AG also said today a rejection by the French may crimp demand for the euro. A French refusal would deal a blow to the treaty, which requires unanimous support among the 25-nation bloc.

ABN recommends buying euro puts, which are options to sell the currency, and selling calls, which are options to buy the euro. Investors will make money from the strategy should the euro decline, or should the volatility for puts increase more than for calls, Jalinoos said.

ABN, the largest Dutch bank, recommended the strategy for the euro against the dollar, pound, Swiss franc and Swedish krona.

``Volatility is fairly low right now and it makes sense to bet on higher volatility,'' said Jalinoos. ``The market is pricing in zero risk from the referendum and we think the risk is more than zero.''

Call options give holders the right to buy a currency at a set date and price, known as the strike price. Put options give the holders the right to sell. So-called two-month risk reversals, the difference in volatility between put and call options, show traders are prepared to pay equal prices for calls and puts on the euro against the dollar.

The euro traded at $1.2817 at 12:30 p.m. in New York, down 5.4 percent so far this year.

No `Serious' Competitor

The EU's draft constitution, which requires unanimous support among the union's members, was signed by EU leaders in October and is intended to streamline EU operations after the addition of 10 states including Poland and Hungary last year.

Without the new voting arrangement included in the draft charter, the 25-member union may be unable to achieve further political integration, the analysts wrote, raising the risk of a breakup of the 12-nation group that shares the euro.

``A failure to ratify the new constitution will serve as a reminder that the euro is not yet in serious competition with the dollar as the world's main reserve currency,'' Sonja Marten, a currency strategist at Dresdner in Frankfurt, wrote in a report today. Such a result may slow any shift out of dollars and into euros, she wrote.

Currency Reserves

The dollar fell the most in six months against the euro and the most in four months versus the yen on Feb. 22 after the Bank of Korea announced plans to increase returns by diversifying its currency reserves. The bank later said it wouldn't sell dollars.

U.S. dollars accounted for 63.8 percent of the world's currency reserves, which are foreign-exchange holdings at central banks, at the end of 2003, down from 66.9 percent two years before, according to International Monetary Fund figures released in the fund's report for the year through April 2004.

Marten was not immediately available to comment on the report.